Suppose the Fed decides that it needs to pursue a contractionary policy. It wants to decrease the money supply by $2 million. Assume people hold 20 percent of their money in the form of cash balances, the reserve requirement is 20 percent, and there are no excess reserves.

a. Show how the Fed would decrease the money supply by $2 million by changing the reserve requirement.

b. Show how the Fed would decrease the money supply by $2 million through open market operations.

c. Go to your local bank and find out how much excess reserves it holds. Recalculate a and b assuming all banks held that percentage in