Macroeconomics, 2nd Edition by Pearson

THE DEMAND FOR MONEY

169

purchasing power for the day’s expenses. The utility function can accord-

ingly be written as:

U

=

U

(

C,

M

__

P

)

.

(6.13)

This utility function generates standard indifference curves that are downward

sloping. The aim of an individual agent is to maximize utility subject to the

income constraint

10

given in Figure 6.1.

Max

{

C

1

,(

M

1

/

P

1

),

(

B

1

/

i

1

P

1

)}

U

(

C

1

,

M

1

___

P

1

)

(6.14)

such that

Y

1

+

Y

2

_______

(1

+

r

1

)

-

i

1

______

(1

+

i

1

)

M

1

___

P

1

=

C

1

+

C

2

_______

(1

+

r

1

)

}

The agent chooses consumption, ...