Suppose an increase in computer financial technology causes consumers to decrease the amount of money they hold in currency from 5% of the amount they hold in deposits to 1%. The monetary base in $650 million, the required reserve ratio is 3% and banks hold an extra 2% of deposits in excess reserves.
a. What is the impact on M1 money supply?
b. What is the impact on the amount of deposits held in the banking sector?
c. What is the impact on the interest rate in equilibrium?