Money Multiplier, the money supply, the price level. Effect on the economy. Monetary policy. Reserve-deposit ratio. a,b,c,d,e. show all calculations and formulas.

1. [Money] You have been recently hired as the head of the CMC central bank. In order to get a better sense of the CMC economy you start to collect some data and find the following: o The monetary base is $1,000. a The cu rrency-deposit ratio is 1:6. o The reserve-deposit ratio is 1/5. o The velocity of money is 2. 0 Total output 1' is $2,000. a The nominal interest rate is 10 percent. Note: Assume that prices are exible and we are describing the long run a. What is the money multiplier, the money supply, and the price level? (6 pts) b. With the rise of electronic forms of payment, the citizens of CMC decide to hold less currency and the cu rrency-deposit ratio falls to 1/3. How does this affect the money supply and the price level of the CMC economy? Briefly explain the intuition behind the result. (6 pts) c. Now imagine you want to keep the price level the same as it was in part (a). Assuming you use monetary policy as your tool, how many bonds should you buy or sell to accomplish this goal? (5 pts) d. Instead of using monetary policy in part (c), you decide to hold the price level in part (a) constant by changing the reserve-deposit ratio. What should you set the new reserve-deposit ratio as? Briefly explain the intuition behind the result. (5 W) e. Go back to part (b) where the price level has changed due to the popularity in electronic payment. How does the change in price level affect the nominal interest rate? (Note: You should be able to provide a numerical answer. if you can't, describe the eect via economic intuition.) (3 pts)