Problem I. [ll] pains} Consider an economy whose money supply M is determined by the households' cash-deposit ratio or, hanks' reserve-deputit ratio r, and the monetary baseB: M: out-13' cr+rr Moreover, the price level P in this economy is determined by the equilibrium condition for the real money balances: % = my), where L is the demand for real money balances as a function of the interest rate i and the real output Y. Assume further that Y Lu, Y) _ W i = r + Ear, 1" : 2., Ear = 2.. Y = E or = 0.1, w = 0.1. where Err is the expected ination rate in percentages. (11} Suppose that the central bank wants the (annual) ination rate me: the next year to be 2 percent. How much should the central bank let the monetary base B grow over this period relative to the (amt level? (bl Suppose that the stock market crashes and the banks in this economy become extremely cautious. As a result, they raise their reserve-deposit ratio to 11' = 0.2. The central bank still wants the ination rate over the next year to be 2 percent. How much should the central bank let the monetary base B grow over this period relative to the current level? {e} In addition to the hanks' change in the reserve-deposit ratio to rr = 02, households also respond by raising their cash-deposit ratio to or = 0.2 and adjusting their expected ination to Err = 1 percent. The central bank still wants the ination rate over the next year to be 2 percent. How much should the central bank let the monetary base 3 grow over this period relative to the current level