1)a )Explain the role of banks on the money supply. What is money multiplier? Explain.
b) If the Central Bank increases the required reserve ratio what will happen to interest rate? Using appropriate diagram, show equilibrium in the money market.
c) Which monetary policy has meant in the previous question? By using AD-AS analysis, show the effects of this monetary policy on the price and output level both in the short run and long run. Assume that the economy is initially in a long- run equilibrium.
2)By using AS-AD analysis explain why the sustained inflation is a monetary phenomenon.
3) Using AD-AS analysis, describe the effects of following actions on the economy both in the short and long run.
a) The central bank makes an open market purchase of government bonds.
b) A decrease in wages.