Numerical Problem 3 Question Help Mr. Midas has wealth of $50,000 that he invest
ID: 2526925 • Letter: N
Question
Numerical Problem 3 Question Help Mr. Midas has wealth of $50,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs his broker to invest $25,000 in bonds, plus $2,500 more in bonds for every percentage point that the interest rate on bonds exceeds the interest rate on his checking account. Checking accounts pay no interest. Suppose that all holders of wealth in the economy are identical to Mr. Midas. Fixed asset supplies per person are $37,500 of bonds and $12,500 of checking accounts. What is the interest rate on bonds in asset market equilibrium? % (enter your response as a whole number) Hint: Remember that in equilibrium, supply of bonds equals demand of bonds and, likewise, supply of money equals demand of money. Each of these equalities provides a way to find the interest rate on bonds. You should be able to find an algebraic formula for Mr. Midas's demand for money or his demand for bonds, depending on how you wish to solve the problem.Explanation / Answer
The Interest Rate of Bond in Market Equilibrium comes to 5% as for every a percent increase in the rate of Bond over checking account the Investment in bond is to be increased with 2500.
At the Given COndition, the Investment is 37500 which is 12500 higher than the planned 25000. The Higher Amount Implies that in case of Market equilibrium where the checking account interest is assumed as zero, the bond could yield 5%(12500/2500).
Hence the Interest Rate is 5%
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