1.National saving is 200 and investment demand is = 250 10, where r is the real interest rate (expressed in % not decimal places). Assuming the Fed hits the target inflation rate of 2%, what is the nominal interest rate in equilibrium? Suppose now the government wishes to target a 3% nominal interest rate. All else equal, how much do they need to change government spending?

2.(30 marks) Consider the following system with infinitely many banks and a reserve ratio of 10%:

a.Currently, there is no currency holding and deposit and all the balance sheets of banks are empty. Peter then makes an initial deposit of $3000 dollars into Bank A. What is the immediate reserve kept at Bank A (note no loans being extended yet)? What is the excess reserve and what is the amount Bank A can loan out? What is the eventual system-wide money supply, reserves and loans? [Hint: consider the money creation process.

b.Using the result from a. as a starting point, evaluate the change in money supply if John withdraws $100 from his bank account. Explain briefly what is happening behind these numbers. Verify your answer using the algebraic (equilibrium) expression in the lecture notes. [Hint: the hint from part a.]