ASSETS

Reserves $100,000

Loans $400,000

LIABILITIES

Deposits $500,000

Suppose that the T-account for First National Bank is as shown above;

a.If the Fed requires banks to hold 5 percent of deposits as reserves, how much in excess reserves does First National now hold? [5 marks]

b. Assume that all other banks hold only the required amount of reserves. If First National decides to reduce its reserves to only the required amount, by how much would the economys money supply increase? [5 marks]

c. The BOZ conducts a K10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain. [5 marks]