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# The total demand for money is equal to the transactions demand plus the asset demand for money.

1. The total demand for money is equal to the transactions demand plus the asset demand for money.
(a) Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services. If the nominal GDP is \$10,000 billion (\$10 trillion), what is the transaction demand?
(b) The table below shows the asset demand at certain rates of interest. Using your answer to part (a), complete the table to show the total demand for money at various rates of interest.

interest rate asset demand total demand
(in %) (billions) (billions)

10 \$ 30 \$
8 60 \$
6 90 \$
4 120 \$

(c) if the money supply is \$2060 billion, what will be the equilibrium rate of interest?
(d) if the money supply rises, will the equilibrium rate of interest rise or fall?
(e) if GDP rises, will the equilibrium rate of interest rise or fall?

2. Suppose Anne borrows \$500 at an interest rate of 7% which she will pay off in 5 years. Answer the following questions.

(a) how much will she owe at the end of the 5 years, assuming the interest is compounded?
(b) If Anne is planning to invest her loan in an asset that she hopes to turn a profit on, what is the minimum rate of return she needs to earn?
(c) Suppose Anne is able to pay off her loan in 3 years. What is the size of the repayment she will owe? What rate of return will she have to earn now to at least break even?

3. Suppose there are only two planets in the universe Zenope and Zuranda. On each planet its inhabitants consume two products--coffee and fried chicken. Each planet has an equal population. producing soley coffee, Zenope can produce 50 units of coffee, while Zuranda can produce 80 units of coffee. Producing solely fried chicken, Zenope can produce 25 units while Zuranda can produce 30 units.
(a) which planet has the absolute advantage in coffee? In fried chicken?
(b) which planet has the comparative advantage in coffee? in fried chicken?

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