Suppose the Income Elasticity of Money Demand Is 0

question 91

Essay

Suppose the income elasticity of money demand is 0.75 and the interest elasticity of money demand is -0.2.By what percentage does real money demand change in each of the following circumstances?
a.Income rises 2%.
b.The interest rate rises from 4% to 5%.
c.Income falls 4%.
d.The interest rate falls from 6% to 4%.
e.Income rises 3% at the same time that the interest rate rises from 2% to 3%.

---

Definitions:

Safety Stock

An additional quantity of an item held in inventory to reduce the risk of stockouts.

Direct Materials

Raw materials that are directly attributable to the product being manufactured and can be easily identified and measured.

Budgeted Production

The planning of how many units of a product a company aims to produce within a specific period.

Activity-based Budgeting

A budgeting approach based on the activities that incur costs within an organization, focusing on managing business activities that drive costs.