Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.
A. If the Federal Reserve system buys $10 of government bonds from banks, by how much would the following change (include a minus sign if the value falls)?
i. The money supply (MI)
ii. The monetary base
B. Instead of the bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. The money supply (MI)
ii. The monetary base
C. Suppose the money supply increases by 3%, the real GDP rises by 2% and velocity is constant. By how much do prices rise? Explain why or show your work.