Money and the banking system I described a monetary system that included simple banks in Section 4-3. Assume the following:

i. The public holds no currency.

ii. The ratio of reserves to deposits is 0. 1 .

iii. The demand for money is given by

\[
M^{d}=\$ Y(0.8-4 i)
\]

Initially, the monetary base is \(\$ 100\) billion, and nominal income is \(\$ 5\) trillion.

a. What is the demand for central bank money?

b. Find the equilibrium interest rate by setting the demand for central bank money equal to the supply of central bank money.

c. What is the overall supply of money? Is it equal to the overall demand for money at the interest rate you found in part (b)?

d. What is the effect on the interest rate if central bank money is increased to \(\$ 300\) billion?

e. If the overall money supply increases to \(\$ 3,000\) billion, what will be the effect on \(i\) ? [Hint: Use what you discovered in part (c).]

Data from section 4-3

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What Banks Do Modern economies are characterized by the existence of many types of financial in- termediaries-institutions that receive funds from people and firms and use these funds to buy financial assets or to make loans to other people and firms. The assets of these institutions are the financial assets they own and the loans they have made. Their liabilities are what they owe to the people and firms from whom they have received funds. Banks are one type of financial intermediary. What makes banks special-and the reason we focus on banks here rather than on financial intermediaries in general is that their liabilities are money: People can pay for transactions by writ- ing checks up to the amount of their account balance. Let's look more closely at what they do. The balance sheet of banks is shown in the bottom half of Figure 4-6, Figure 4-6b.