(1)Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves.

a.If the Fed sells $10,000 of government bonds, what is the effect on the economy's reserves and money supply?

b.Now suppose the Fed lowers the reserve requirement to 5%, but banks choose to hold another 5% of deposits as excess reserves. Why might banks do so?

c.What is the overall change in the money multiplier and the money supply as a result of these actions?