(a) A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement is 20 percent. If the reserve requirement is lowered to 10 percent, calculate the bank's excess reserves. (2 marks)

(b) Continuing with part (a), suppose the simple deposit expansion model holds and the bank lend out all of its excess reserves. Estimate the potential expansion of checkable deposits. (2 marks)

(c) Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel. Explain how an expansionary monetary policy affects the economy through this channel. (3 marks)