Economics 470
Fall 2008
Homework 5
Due Tuesday, November 11
1. What is the money demand function in the classical model? How does the money demand function differ under the Cambridge approach? Why is this important?
2. Explain the speculative motive for holding money in Keynes liquidity preference theory and why, in aggregate it is negatively related to the interest rate.
3. Show the money demand curve graphically and explain why it slopes downward. Show how the money demand curve shifts when income increases. How does the money demand curve shift if there is an increase in the riskiness of financial assets?
4. What did Tobin add to Keynes theory of the speculative demand for money? Why was this development important?
