Redo given Question, but do not assume the monetary base is constant. Instead, answer each part of the question assuming the Fed targets the money supply. Then answer each part assuming the Fed targets the interest rate. What happens to the monetary base in each of these cases?
Question
Suppose that foreigners start holding more U.S. currency. For a given interest rate, Americans don't change their holdings of either currency or checking deposits .Assume the Fed keeps the monetary base constant. Describe what happens to
(a) the money supply,
(b) the money-demand curve, and
(c) the equilibrium interest rate. Explain your answers.