1. a. The central bank of a country directly influences the components of money supply through 100-percent-reserve-banking or fractional reserve banking. By distinguishing between these two methods, explain how the central bank directly influences the components of money supply.

b. The following equation is used to model money supply under fractional-reserve banking:

M= cr+1 * B

Cr+11

i) Identify the variables within the equation

ii) Explain how the exogenous variables within the equation influence money supply and cause it to change.

iii) Suppose the banks in an economy have a reserve-deposit ratio of 12 percent and the currency-deposit ratio is 25 percent. Also, the Central Bank increases the monetary base by $400 through open market operations, how would the money supply change?

c. If the central bank desired to increase spending in the economy, using the instruments of monetary policy, explain how the central bank can indirectly achieve this.

d. Explain the difference between portfolio and transactions theories of money demand.