In the Republic of Ragu, the currency is the rag. During 2009, the Treasury of Ragu sold bonds to finance the Ragu budget deficit. In all, the Treasury sold 50,000 10-year bonds with a face value of 100 rags each. The total deficit was 5 million rags.

Further, assume that the Ragu Central Bank reserve requirement was 20 percent and that in the same year, the bank bought 500,000 rags’ worth of outstanding bonds on the open market.

Finally, assume that all of the Ragu debt is held by either the private sector (the public) or the central bank.

a. What is the combined effect of the Treasury sale and the central bank purchase on the total Ragu debt outstanding? on the debt held by the private sector?

b. What is the effect of the Treasury sale on the money supply in Ragu?

c. Assuming no leakage of reserves out of the banking system, what is the effect of the central bank purchase of bonds on the money supply?