a. “The money supply of an economy increases when the central bank simultaneously decreases the reserve requirement and sells government bonds in open market.” Explain whether this statement is true, false or uncertain.
b. What should money growth rate be if real output grows 4% per year, velocity grows 2% per year, and the central bank targets inflation to be 2% per year?
c. Explain what is the inflation tax?
d. Explain (with the aid of diagrams) whether the central bank can achieve the stability of interest rate and money supply at the same time when money demand changes.