Money and banking

Since it must be that k = y ~ It we'll focus our attention to the Fisher equation that characterize a stationary equilibrium (3) and the ination rate PHl/pt: rewritten here as: wf'Cy vtht) = ((1 + 0')Rb '* O'Rm) " Pt+1 This equation is enough to answer the folling 2 questions. Assuming R5 > Rm (reserveshre scarce) ,suppose that the central bank surprises indi- viduals by suddenly raising its policy rate Rb, while keeping all (Rm, a) constant. 9. What happens to the level of real debt otht and capital stock It, and ination pt+1 / pt? How would your answer change with an increase of R\"? [19 points] Imagine, instead, that Rb is market determined and that the monetary authority inu ences the interest rate through open market sales/ purchases of government debt. That is to say, imagine that the central bank chooses 0 instead of Rb 10. Using m = ark, h = 3; 4~ k, m = 6h Show that h = (fay. What are the effects of a permanent reduction in I9? [19 points]