1.Suppose the current require reserve ratio is 10% and all commercial banks hold 5% excess reserves.

a.Suppose the Fed had an open market sale of U.S. government securities for $100,000 to Megabank (a commercial bank).

i.How does this change affect the balance sheets of Megabank and the Fed? (Write out two t-accounts to show the changes, one for Megabank and one for the Fed.)

ii.How much change inmonetary baseis caused by this open market operation? Also, calculate how much change in themoney supplyis caused by this open market operation.

b.Suppose the Fed enforce the above open market operation and also decrease the reserve requirement from 10% to 7%. How much change inmonetary baseis caused by these two policies together? Also, calculate how much change in themoney supplyis caused by these two policies together.

c.Briefly explain why your answers for (a-ii) and (b) are different.