Exercise 1: Answer the following questions. Justify your answers using the concepts developed in the lecture notes and power points. Suppose that the central bank buys $1.5 million worth of government bonds from banks. Suppose that the banks desired reserve ratio is 0.25 at kind of operation is it? What happens to the banks' t after the central bank's purchase? b) According to chapter 19 of the lecture notes, what happens to the price of bonds and to the nominal interest rate: only the direction of change is required? Justify your answer. c) What happens in the long run to the money supply if the public, other than banks, does not add to its currency holdings and the banks do not keep more than the desired reserves? Will total credit in the economy expand or contract and by how much? Justify your answer. The following questions are independent of the preceding question. d) What happens to the banks' desired reserve ratio during a recession? e) What happens to the banks' desired reserve ratio during an expansion? f) Does your answer to question (2) above depend on whether the central bank's purchase happened during a recession or an expansion