Mr. Midas has wealth of $100,000 that he invests entirely in money (a checking account) and government bonds. Mr. Midas instructs his broker to invest $50,000 in bonds, plus $5000 more in bonds for every percentage point that the interest arte on bonds exceeds the interest arte on his checking account.
a) Write an algebraic formula that vies Mr. Midas's demand for money as a function of bond and checking account interest rates.
b) Write an algebraic formula that gives Mr. Midas's demand for bonds. What is the sum of his demand for money and his demand for bonds?
c) Suppose that all holders of wealth in the economy are identical to Mr. Midas. Fixed asset supplies per person are $80,000 of bonds and $20,000 of checking accounts. Checking accounts pay no interest. What is the interest rate on bonds in asset market equilibrium?