. Suppose the Baumol-Tobin model of money demand is correct. The typical person has annual money income of $60,000, the product of 30,000 real income and a price level of 2. The brokerage fee is $4.

a. The money supply per person is $2000. What is the value of the nominal interest rate? Why?

b. Now suppose the Fed wants to reduce the nominal interest rate to 1% (.01). What will they need to do to the money supply - by how much and in what direction must it be changed?

c. The Fed wants to maintain the interest rate at 1% despite what they expect will be a 5% increase in real income. By how much, in what direction, and by what percent should the money supply be changed? (Before the change, the money supply is at the level you found in part b. above).

d. Instead of real income, suppose the Fed expects the price level to increase by 5%. To maintain its 1% target for the interest rate, by how much and in by what percent should they increase the money supply?