Consider a simple model like the one we studied in class, featuring three agents: a central bank, a representative private bank and a representative household. The private bank starts with $1000 in loans, $300 in government bonds (we will simply call these, securities) and $150 in reserves. On the liability side, the bank faces $1000 in deposits. The Central bank has $500 of securities while facing liabilities for $150 in reserves (the ones that the private bank has) and $250 in currency under circulation The household holds currency for $250 and has deposits at the private bank for $1000. It faces no liabilities. The reserves-to-deposit ratio that mandates the private bank's lending behavior is given by = R E = 0.1 0.05 = 0.15 = Reserves Deposits. Where R = 0.1 is the required reserve ratio (dictated by legal regulation) and E = 0.05 is the excess reserve ratio, which means that the bank wants to hold slightly above the minimum requirement (so that it can successfully deal with both liquidity and credit risk). On the household side, the key parameter is = currency currency deposits = 0.2 Throughout this exercise, we will assume that both and