Assume that an economy is in long-run equilibrium. Assume that consumers wish to hold less money because they use credit cards more frequently to purchase goods and services than cash.

(a) What will happen to the interest rate?

(b) Based on the change in the interest rate in part (a), what will happen to each of the following in the

short run?

(i) Prices of previously issued bonds

(ii) The price level and real income. Explain.

(c) With a constant money supply, based on your answer to part b(ii), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate?

(d) If the central bank wishes to reverse the change in the interest rate identified in part (a), what open market operation would it use? Why?