Assume an economy's monetary base is $1,000, currency held by the public is $400 and

bank reserves are $600. Assume that the reserve deposit ratio, rr, is 0.1.

(a) Calculate the currency deposit ratio and the money supply.

(b) Suppose now that the Fed increases the interest it pays banks for holding reserves.

As a consequence, banks increase reserves. The total amount of reserves that

banks hold are now 800. How much is the new value of the money supply?

(c) Describe what variables of the model are aected by the Fed policy described in

(b) and provide intuition for each of the changes.