Bob receives a portion of his income from his holdings of interest-bearing US. government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-ination scenario and a high- inflation scenario. Given the real interest rate of 2.5% per year, nd the nominal interest rate on Bob '5 bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Compared with higher ination rates, a lower ination rate will V the after-tax real interest rate when the government taxes nominal interest income. This tends to V saving, thereby V the quantity of investment in the economy and V the economy's long-run growth rate. Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Supply (Percent) Simple Money Multiplier (Dollars) 25 _' ' 10 v v A lower reserve requirement is associated with a V money supply. Suppose the Federal Reserve want: to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. [f the reserve requirement is 10%, the Fed will use open-market operations to V worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to V to V . Under these conditions, the Fed would need to V _ worth of U.S. government bonds in order to increase the money supply by $200. Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. C] The Fed cannot control the amount of money that households choose to hold as currency. C] The Fed cannot prevent banks from lending out required reserves. C] The Fed cannot control whether and to what extent banks hold excess reserves