Suppose the real money demand function is:

Md / P = 1500 +0.2Y - 10,000(r + pi^e)

Assume M = 3600, P = 2.0, pi^e = 0.01, and Y = 5000

a) Now explain exactly why the real rate of interest had to change the way it did to clear the money market. Please be clear with the intuition being sure to refer to the bond market in your answer. You should begin your response with "At the same real rate of interest, the money market is no longer clearing. In particular money demand...." you can finish the rest.

b) Suppose the Fed wanted to keep real interest rates constant at their original level. Suppose also that the money multiplier is 0.75, which is consistent with reality since the Fed began paying interest in reserves beginning in October 2008 What exactly would the Fed have to do to keep real interest rates constant at their original level? Be specific with regard to the type and quantity of open market operations the Fed would need to conduct to be successful in keeping real interest rates constant at their original level.

c) Finally, explain the movement to the new equilibrium in the money market given the Fed expansion and show on your diagram as point C.