Now suppose the money supply model reflects an economy in which, at a given price level, the narrowly defined money supply (M1) in existence is $22550 million, the cash reserve ratio against demand deposits (r_D) is 10%, the cash reserve ratio against term deposits (r_T) is 3%, the term deposit ratio (t) is 90%, the currency/deposit ratio (c) is 25%, the idle excess reserves/deposit ratios for demand (e_D) and term deposits (e_T) are equal to 2% and 1% respectively.

If this economy faces serious inflationary pressures and this causes the monetary authorities to implement a monetary and fiscal policy package that results in a decrease in the monetary base by 30% whilst the currency/deposit ratio increases by only 15%, because of an increase in taxes; (a). Other things being equal, calculate the percentage changes in the equilibrium values of M1, M2, C, and (BCR_T), and under specified assumptions, illustrate and explain the effects of the total policy package on the equilibrium level of the broad money supply (M2).

(b). If the private deposit-taking institutions (i.e., the banks) had INSTEAD agreed to increase BOTH their desired idle excess cash reserves against both demand and term deposits by 30% each, what would have been the percentage change in ONLY the broad money supply? Illustrate with the appropriate diagram and comment fully on your answer.

(c) Lastly, suppose the banks hold borrowed reserves (BR) in this economy according to the following relation:

(BR)/(MB) = 5[R - b].

where R and b are respectively the market interest rate and the bank rate (measured in fractional units)and MB is the initial value of the monetary base. If the bank rate is 3.5 per cent and the market rate of interest is 4 per cent, calculate the percentage changes in the values of borrowed reserves (BR) AND non-borrowed reserves (NBR) after the implementation of the policy package.