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 buys $10 of government bonds from banks, by how would would the following change (include a minus sign if the value falls)?
i. the money supply (M1)
ii. the monetary base
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.