Suppose Abby uses Bank A and Bala uses Bank B. REPRODUCE THE BALANCE SHEETS BELOW IN YOUR BLUEBOOK TO USE FOR QUESTIONS BELOW. Bank A Central Bank Bank B Assets Liabilities Assets Liabilities Assets Liabilities Reserves $100 Interbank lending $0 Loans & govt bonds $1,000 Deposits Abby $500 Interbank borrowing $0 Net Worth $600 Govt bonds Reserves Bank A $100 Bank B $100 Reserves $100 Loans & govt bonds $1,000 Interbank lending $0 Deposits Bala $500 Interbank borrowings $0 Net Worth $600

ASSETS	LIABILITIES	ASETTS	LIABILITIES	ASSETS	LIABILITIES
Reserves $100 Interbank lending $0 Loans & govt bonds $1,000	Deposits Abby $500 Interbank borrowing $0 Net Worth $600	Govt bonds	Reserves Bank A $100 Bank B $100	Reserves $100 Loans & govt bonds $1,000 Interbank lending $0	Deposits Balance $500 Interbank borrowings $0 Net Worth $600
BANK A	A	CENTRAL	BANK	BANK B	B

a) Abby writes Bala a check for $40. Balance deposits the check in Bank B. The check clears. Indicate how this changes the balance sheets of Bank A, Bank B and the central bank by labeling the changes with the letter a). What happens to the amount of money in the economy?

b) Given event a), now suppose Bala writes Abby a check for $160. Abby deposits the check in Bank A. Indicate how this changes the balance sheets of Bank A, Bank B and the central bank by labeling your changes with letter b). Does Bank B have enough reserves for Balas check to clear?

c) Suppose Bank B borrows reserves from Bank A in the interbank market in order for Balas check to clear. How much will Bank B have to borrow? Indicate how this changes the balance sheets above by labeling your changes with letter c).

d) The central Bank does an open market purchase of $60 in government bonds from Bank A. How does the central bank pay for the purchases of bonds? What happens to the balance sheets of Bank A and the central bank? Indicate how this changes the balance sheets above by labeling your changes with letter d. What happens to total reserves and the policy interest rate, assuming the interbank starts with on the negative slope part of the reserve demand curve?

e) Bank B makes $80 loan to Bala by increasing Balas deposits by $80. How does bank B get the funds that it lends to Bala? Indicate how this changes the balance sheets by labeling your changes with letter e. What happens to amount of lending and money in the economy due to the bank loan?