Suppose that the reserve requirement for checking deposits is 15 percent and that banks do not hold any excess reserves.

1. If the Fed sells $3 million of government bonds,what is the effect on the economy's
2. reserves and money supply, if there is no cash held by the public?
3. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose
4. to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?