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Part II: Short Questions 1. (25%) Assume that when the central bank make a open market purchase of $100m, the money supply ultimately changes by

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Part II: Short Questions 1. (25%) Assume that when the central bank make a open market purchase of $100m, the money supply ultimately changes by $500m. Assume also that banks hold 10% excess reserves and no cash holding. a) What is the money multiplier and what is the required reserved rate in this country? b) Show the changes in the T-account of the banking system. c) Draw a graph to show the effect on reserve market and federal funds rate. d) If the citizens decide to hold some (more) cash, what's the effect on money supply? 2.(15%) The Chinese RMB is trading at 7 yuans per US dollar. If the expected U.S. inflation rate is 2% while the expected Chinese inflation rate is 4% over the next year. L U.S. one year interest rate is 2% and Chinese one year interest rate is 3%. a) Given PPP, what is the expected exchange rate in one year? b) How will the current exchange rate change? Draw a graph to show

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