In the Republic of Doppelganger, the currency is the ditto. During 2018, the Treasury of Doppelganger sold bonds to finance the Doppelganger budget deficit. In all, the Treasury sold 80,000 ten-year bonds with a face value of 1,000 dittos each. The total deficit was 80 million dittos. The Doppelganger Central Bank reserve requirement was 16 percent and in the same year, the bank bought 10 million dittos’ worth of outstanding bonds on the open market. All of the Doppelganger 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 Doppelganger debt outstanding? On the debt held by the private sector?

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

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?