Use the following information to answer the next four questions

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Use the following information to answer the next four questions.

mm = money multiplier = 0.8

MB = monetary base = 3000

Money Demand: Md = P X [ a0 + 0.5(Y) - 200(i) ] where: a0 = 1000, Y = 3600

For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. Y is also held constant in this problem.

1. What is the equilibrium interest rate (i)?

a. 2%

b. 2.5%

c. 3%

d. 1%

e. None of the above

2. Suppose a0 falls to 800.

What is the new equilibrium interest rate?

a. 2.5%

b. 2%

c. 3%

d. 1%

e. None of the above

3. Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in #1).

What would the Fed have to do in terms of open market operations to achieve this?

a. 2200 in open market sales

b. 250 in open market sales

c. 200 in open market purchases

d. 200 in open market sales

e. 250 in open market purchases