Assume that Elliott deposits $1,000 in coins he collected into his checking account. The required reserve ratio for the banking system is 10% and Elliott's bank was fully loaned up prior to his deposit.

1. Explain the immediate effect of his deposit on the M1 measure of the money supply.
2. Calculate the following:
3. the maximum amount the bank will loan out
4. the maximum increase in the money supply as a result of this transaction
5. Now assume that the Federal Reserve purchases $10 million in government bonds. Calculate the maximum increase in the total money supply.
6. Given the increase in the money supply when the Federal Reserve purchases bonds, are people with fixed incomes better off, worse off, or unaffected? Explain.