Assume the following: i. The public holds no currency.
ii. The ratio of reserves to deposits (O) is 0.08.
iii. The demand for money is given by • Mo = $Y(0.88 – 2.6i).
If the monetary base is $89 billion and nominal income is $4.7 trillion, the equilibrium interest rate will be %. (Round your response to two decimal places.) Now suppose the monetary base (central bank money) increases to $125 billion. As a result, the equilibrium interest rate becomes %. (Round your response to two decimal places.) Instead of computing the equilibrium interest rate from the market for central bank money, its value can also be determined by equating the overall money supply with the demand for money. Suppose the money supply was initially $1,113 billion when the equilibrium interest rate was 24.74%. An increase in the money supply to $1,563 billion will, all else constant, cause the interest rate to
A. fall to a slightly higher rate relative to that indicated by the market for central bank money, since the central bank money is "high powered."
B. fall to the same rate indicated by the market for central bank money.
C. fall to a much lower rate relative to that indicated by the market for central bank money, since the money supply always exceeds the monetary base.
D. none of the above, since the demand for money is not the same in these two markets.