Assume that commercial banks have $100 billion of checking deposits and $4 billion of vault cash. Further assume tlrnt reserve requirements are 10 percent of checking deposits. Lastly, assume that the public holds $200 billion of currency, which is always fixed. Centralbank assets include only government securities.

a. Construct the balance sheets for the central bank and the banking system. Make sure you include banks' deposits with the central bank.

b. Now assume that the central bank decides to engage in an open-market operation, selling $1 billion worth of government securities to the public. Show the new balance sheets. What has happened to M?

c. Finally, using the graphical apparatus of the monetary transmission mechanism, show the qualitative impact of the policy on interest rates, investment, and output.