1. Given the following T- account:

Assets		Liabilities
Reserves	$20,000	Deposits	$100,000
Loans	$80,000

1. If the central bank requires banks to hold 15% of deposits as reserves, how much an excess reserve does the first bank now hold?

2. Assume that the banks hold only the required amount of reserves, by how much would the economy's money supply increase?

2. Explain the effect of decreasing RRR on interest rate.

Show your answer graphically.