Bank A is a commercial bank in Fredonia with the following balance sheet (T-account). The banking system in Fredonia has limited reserves.

Assets Liabilities

Reserves $140,000 Demand Deposits $700,000

Government Bonds $860,000 Owners' Equity $300,000

(a) Calculate the required reserve ratio if Bank A holds no excess reserves. Show your work.

(b) The central bank of Fredonia buys $100,000of government bonds from Bank A. What is the dollar value of the change in the monetary base? Explain using numbers.

(c) Based on your answer to part (a), calculate the maximum change in the money supply as a result of the central bank bond purchase after all adjustments take place in the banking system. Show your work.

(d) Given the change in the money supply in part (c), calculate the change in nominal gross domestic product if the velocity of money is 1.5 . Show your work.

(e) Assume the economy of Fredonia is initially at full employment. Based solely on the change in the money supply in part (c), will real output increase, decrease, or stay the same in the long run? Explain.