2. Let's go back to our previous example regarding the Washington Bank. Now let's introduce a central bank that issues base money to commercial banks at the policy interest rate (i). Let's assume that at the end of the day, the Washington Bank does not have enough base money to meet its obligations (and it cannot borrow from other commercial banks).

a) How can the central bank assist the Washington Bank to meet its obligations? Explain.

b) What price does the Washington Bank pay for this assistance? Explain.

c) From the perspective of the central bank (at least in this country), what is the fundamental purpose of the money market?

d) Let's now assume the following represents the Washington Bank's balance sheet, and most of the bank's customers want to take their savings out of the bank because of reports that the bank has made fraudulent loans to mobsters. What is the potential problem for the customers? Explain referring to the bank's balance sheet.

Washington Bank Balance Sheet

Assets: Base Money $1b Loan $330b Total $331b

Liabilities: Payable on demand to customers $331b