Problem 1: Suppose you are the head of the central bank and your mandate is to maintain the price level at a constant rate. Explain what you would do to the money supply in response to each of the following events. Discuss for each case a policy change of 1. an increase / decrease of the reserve requirement; and 2. an increase / decrease in the monetary base. Assume that growth in real GDP affects the growth in real money demand equally i.e., T = T i and that the economy is closed or a large open economy. a) Real GDP increases once by 4 percent. b Real GDP declines once by 1 percent. c Real GDP is growing at 3 percent per year. d Government spending increases and affects real money demand by 3 percent. ) ) ) ) e The expected rate of inflation, we, rises