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2. Suppose the following assumptions hold: o The public holds 40% of their money in the...

2. Suppose the following assumptions hold: o The public holds 40% of their money in the form of currency. o The ratio of reserves to deposits is 0.1. o The demand for money is given by: Md = $Y (0.8 – 4i) Initially, the monetary base is 460 billion, and nominal income is 2500 billion.

(a) What is the demand for high-powered money?

(b) Find the equilibrium interest rate by setting the demand for high-powered money equal to the supply of high-powered money.

(c) What is the overall supply of money? Is it equal to the overall demand for money at the interest rate you found in (b)?

(d) Calculate the impact on the interest rate if high-powered money is increased to 690 billion.

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