Question

Consider the following balance sheet of the Central Bank of Utopia: Assets LiabilitiesGovernment bonds $2,000 Currency + Reserves $2,000 In answering the following questions, assume that (i) the public wishes to hold 20 percent of its money holdings as currency, (ii) the ratio of reserves to deposits is 0.25, (iii) nominal income in Utopia is $25,000, and (iv) demand for money is given by = $(.86). a) Solve for the equilibrium interest rate in the Utopian economy.b) Calculate the money multiplier and the overall supply of money.c) Calculate the amount of reserves and currency in the Utopian economy. d) Suppose nominal GDP in Utopia increases to $30,000. Which action would the central bank have to take in order to keep the interest rate constant? Describe in detail how the central bank’s balance sheet would change. e) Suppose all government bonds in the Utopian economy are one-year bonds which promise a payment of $100 in one year. Based on the situation described in part d), calculate by how much bond prices would change if the central bank would let the interest rate freely adjust.