Assume Mesquite First National Bank is fully loaned up and that the reserve requirement is 20%. Mikey deposits $5,000 into the bank.

1. Calculate the long-run impact of this deposit on the money supply. (Calculate means to show your work.)

2. Explain two limitations of the money creation process.

3. Suppose the reserve requirement is lowered to 10% instead of 20%. Explain how the reduction in the reserve requirement affects the total money supply and how much money the bank can now create using the new reserve requirement if Mikey deposits $5,000 into the bank