Assume that Jill deposits $20,000 in cash into Welcome National Bank and the central bank has set a required reserve ratio of 10%.

a. Explain the immediate effect of her deposit on the M1 measure of the money supply.

b. If Welcome National Bank holds an additional 10% of her deposit in reserves, calculate the following:

1. the maximum amount the bank will loan out
2. the maximum increase in the money supply as a result of this transaction