Suppose that the required reserve ratio is 0.12 for deposits and d that there are no excess reserves. Suppose also that the total demand for currency is equal to 0.3 times deposits.
a. If the monetary base is $40 billion, what is the level of the money supply?
b. By how much does the money supply change if the Fed increases the required reserve ratio to 0.20? Assume that monetary base is unchanged at $40 billion.
c. By how much does the money supply change if the Fed buys $1 billion of government bonds in the open market? (Keep the required reserve ratio at 0.12)