Problem 4. (10 points) Consider an economy whose money supply M is determined by the households' cash-deposit ratio cr, banks' reserve-deposit ratio /7, and the monetary base B: B. cr + rr Moreover, the price level P in this economy is determined by the equilibrium condition for the real money balances: M = L(i, Y). where L is the demand for real money balances as a function of the interest rate i and the real output Y. Assume further that Y L(i, Y) = i=r+ Ex, r = 2, ET = 2, Y = Y, cr = 0.1, Tr = 0.1. where Ex is the expected inflation rate in percentages. (a) Suppose that the central bank wants the (annual) inflation rate over the next year to be 2 percent. How much should the central bank let the monetary base B grow over this period relative to the current level? (b) Suppose that the stock market crashes and the banks in this economy become extremely cautious. As a result, they raise their reserve-deposit ratio to ry = 0.2. The central bank still wants the inflation rate over the next year to be 2 percent. How much should the central bank let the monetary base B grow over this period relative to the current level? (c) In addition to the banks' change in the reserve-deposit ratio to ry = 0.2, households also respond by raising their cash-deposit ratio to cr = 0.2 and adjusting their expected inflation to En = 1 percent. The central bank still wants the inflation rate over the next year to be 2 percent. How much should the central bank let the monetary base B grow over this period relative to the current level