Question 1. (70 pts) Assume that there is only one private bank whose equity or net worth is always zero. Also maintain the following assumptions: (A1) The ratio of cash holdings by the nonbank public to demand deposits is 0.06, and all bank liabilities are demand deposits; (A2) The bank keeps the reserve/deposit ratio at 0.1; (A3) Demand deposits, bank loans and Treasury securities bear zero net interest. Use the notation C for the non-bank public's cash holdings, D for demand deposits, R for bank reserves, and L for bank loans. Round up all dollar amounts to 0.01 billion. (1) (18 pts) Assume that the initial monetary base is MB 2 $16 billion and that the bank holds $14 billion Treasury securities. In addition to the Treasuries, the bank's assets are loans to the private sector and bank reserves. Suppose that the cash/deposit ratio has reached 0.06 and the reserve ratio has reached 0.1. Calculate the nonbank public's cash holdings, deposits, bank reserves, bank loans, and the money stock M 1. Fill in the bank's balance sheet with the corresponding items. (2) (14 pts) Suppose that the government increases the requirement on the reserve ratio to 0.14 and that the bank keeps the holdings of Treasuries at $14 billion. After the cash/ deposit ratio has reached 0.06 and the reserve ratio has reached 0.14, recalculate the nonbank public's cash holdings, deposits, bank reserves, and bank loans. By how much does M1 fall? For the remainder of Question 2, go back to the assumption that the reserve requirement is 0.1. Start in the situation reached in (1) above. Consider an open market operation in which the bank sells $14 billion Treasuries to the Federal Reserve and lends the proceeds of the sale to the private sector. (3) (5 pts) Fill in the bank's balance sheet at the time after the lending of the sale proceeds of Treasuries ($14 billion) and before the private sector deposits any part of the money back in the bank. (4) (20 pts) The private sector deposits part of the $14 billion new loans back to the bank following the rule (A1). In turn, the bank lends out part of the new deposits and keeps the reserve ratio at 0.1. After this new round of bank lending but before the next round, calculate demand deposits, bank reserves, bank loans, the public's cash holdings, and the money stock M1. Fill in the bank's balance sheet after this round of activities. (5) (13 pts) Suppose that the cash/deposit ratio nally settles back at 0.06 and the reserve ratio settles at 0.1. Calculate demand deposits, bank reserves, bank loans, and the public's cash holdings. By how much has the open market operation increased the money stock M1