Use the subsequent money demand equation and Compute monetary base
Consider the subsequent money demand equation:
The notation is the same as in class. Suppose which the required reserve ratio is .1 and people do not hold currency.
1) If the Fed wants to set an interest rate R=5, illustrate what must the monetary base be?
2) During Christmas time, people demand more money and the money demanded equation becomes.
Assuming the Fed does not change the money supply, illustrate what will the interest rate become?
3) illustrate what monetary base would the Fed have to set in order to set the interest rate back to its target of 5?