Assume the following:
Long-term interest rates............... 8%
Discount rate.......................... 5%
Marginal propensity to consume...... 60%
Required reserve ratio...................20%
Short-term interest rates................ 6%
If the Fed bought $10,000 of bonds on the open market, ceteris paribus, what is the theoretical maximum impact of that purchase on:
a. Deposits in the commercial banking system
b. New loans by the commercial banking system