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Problem 1: Keynesian liquidity preference theory [10 marks]Assume an investor who decides whether to keep her money in cash or to keep it in a [perpetual] bond, yielding coupon rate 7% at the face value RUB1000. Assume also that the market interest rate it in this economy now is 8%, and is likely to move to 8.3% in period t+1 due to fiscal policy decisions.1. (1 mark) Calculate the total return from holding this bond.2. (2 marks) Prove that the choice of holding the cash vs. bonds does not depend on the coupon rate.3. (2 marks) Find future interest rate it+1 which will make the investor indifferent between holding this bond and keeping all money in cash.Assume that the central bank wants to ensure that this investor will stop holding money in t+1. Yet the credibility of the policy is only 40%, i.e. the market rate it+1 will react by 40bps for CBs decision to hike the key rate by 1pps.4. (2 marks) By how much the key rate should be hiked to ensure that the individual switches to bonds instead of holding cash?5. (1 marks) How your answer is modified if the policy efficiency is at 85%?6. (2 mark) Is it possible to construct macroeconomic demand for money from this individ- ual decision-making (speculative motive for holding money) if all agents are identical? Please explain

          Problem 1: Keynesian liquidity preference theory [10 marks]Assume an investor who decides whether to keep her money in cash or to keep it in a [perpetual] bond, yielding coupon rate 7% at the face value RUB1000. Assume also that the market interest rate it in this economy now is 8%, and is likely to move to 8.3% in period t+1 due to fiscal policy decisions.1. (1 mark) Calculate the total return from holding this bond.2. (2 marks) Prove that the choice of holding the cash vs. bonds does not depend on the coupon rate.3. (2 marks) Find future interest rate it+1 which will make the investor indifferent between holding this bond and keeping all money in cash.Assume that the central bank wants to ensure that this investor will stop holding money in t+1. Yet the credibility of the policy is only 40%, i.e. the market rate it+1 will react by 40bps for CBs decision to hike the key rate by 1pps.4. (2 marks) By how much the key rate should be hiked to ensure that the individual switches to bonds instead of holding cash?5. (1 marks) How your answer is modified if the policy efficiency is at 85%?6. (2 mark) Is it possible to construct macroeconomic demand for money from this individ- ual decision-making (speculative motive for holding money) if all agents are identical? Please explain

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