Suppose that the T-account for First National Bank is as follows:

Assets Liabilities Reserves $100,000 Deposits $500,000 Loans 400,000

a. If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold?

b. Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economy’s money supply increase?