Essay questions. A. Consider the following utility function of the household where c denotes the level of consumption: u(c) = ln(c). (a) Prove mathematically that the marginal utility of this household is a decreasing function of consumption (b) Consider the extension of the above utility function: u(c) = ln(c c ). Why does this household consume more that c*? What is the economic interpretation of c*?

B. The monetary base (B) is the sum of currency (C) and reserve (R), while money supply (M) is the sum of currency and deposits (D). (a) Derive the relationship between the monetary base and money supply using the reserve-deposit ratio and currency deposit ratio. (b) Provide two reasons why a dramatic increase in the size of the Fed balance sheet did not result in a dramatic increase in the money supply