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
B. Instead of Bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. Money supply (M1)
ii. the monetary base