Suppose the Fed decides to buy $1 billion in Treasury bonds from the public. Assume that the reserve requirement is 10%, banks hold no excess reserves, and the public holds no cash.

1.Whatis the total increase or decrease in the money supply which would result from the Feds action?Explain your answer, and show your calculations.

2.Ifbanks do hold excess reserves, and the public does hold some cash, would the total increase or decrease in the money supply be higher or lower than the figure you found in part (a)?

Explain your answer.