Suppose the behavior of the broad-money supply process in the banking system of a hypothetical economy is characterized by the following supply (Rs) and demand for cash reserves (Rd) model [in which all the relevant variables are as defined in class]:

Rs = MB = Rd = C + BCRT(equilibrium condition);

BCRT = RR + ER (definition of total bank reserves)

C = 0.25D (currency holdings of the non-bank public)

RR = RRd + RRt[total desired cash reserves against bank deposits]

RRd = 0.05D (desired cash reserves against demand deposits)

RRt = 0.02T (desired cash reserves against term deposits)

T = 0.8D (definition of term deposits)

ER = ER d + ER t[total idle excess reserves held against bank deposits]

ER_d = 0.002D(idle excess reserves held against demand deposits)

ER_t = 0.001T (idle excess reserves held against term deposits).

Given that the economy is facing severe unemployment pressures, the government implements an expansionary fiscal policy to stimulate the economy by decreasing taxes and, as an indirect effect, the currency/deposit ratio (c), drops to 20%.

If the narrowly-defined money supply (M1) in existence is $2550 million, first, find the initial monetary base and the value of the broadly defined money supply (M2) and, then, calculate the percentage changes in the equilibrium values of the narrow (M1) and broad money (M2) supplies because of the government's policy stance. Explain and illustrate your answers with the appropriate diagrams, where necessary.