The financial market looks like the following.
1. People decide not to hold currency.
2. The required reserve ratio on deposits is 10 percent
3. The money demand function looks like Md = $Y*( 0.9 - 3*i )
4. Nominal income is $5 Trillion
5. The Monetary Base is $300 Billion
a) What is the demand for central bank money?
b) That is the equilibrium interest rate? Use the expressions for setting the supply and
demand for central bank money equal to each other.
c) What is the aggregate money supply based on the interest rate in part a)?
d) Suppose the central bank engages in Open Market Operations selling $50 Billion in government bonds What happens to the interest rate? What is the aggregate supply of money? Compare your answer with parts b.) and c.)
e) Why might the Central Bank engage in this operation?