1. Using T-accounts please explain what happens to bank reserves and monetary base when a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes to the Fed? You will need to show the changes on two T-accounts, one for the Fed and another for the bank.

2. Lets assume that in a hypothetical economy currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, excess reserves are $15 billion and required reserve ratio is 10%.

a. Calculate money supply, currency to deposit ratio, excess reserve ratio and money multiplier.

b. Suppose Fed conducts very large open market purchase of $1400 billion due to a sharp recession. Assuming the ratios hold, what will be the effect on money supply?

c. Now suppose the Fed conducts the same open market purchase as in part (b) except banks choose to hold all the proceeds as excess reserves. Assuming currency to deposit and required reserve ratios stay the same, what happens money multiplier and money supply?

d. Explain the parallels between part (c) and what happened during the financial crisis of 2008?