Sherman Peabody earns a monthly salary of $1,500, which he receives at the beginning of each month. He spends the entire amount each month at the rate of $50 per day. (Assume 30 days in a month.) The interest rate paid on bonds 10 % per month. It costs $4 every time Peabody sells bond.
a) Describe briefly how Mr. Peabody should decide how much money to hold.
b) Calculate Peabody’s optimal money holding. You can round to the nearest $0.50, and you need to consider only average money holding of more than $100
c) Suppose the interest rate rises to 15 percent. Find the Peabody’s optimal money holding at this new interest rate. What will happen if the interest rate increases to 20 percent?
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