True and false:

Use diagrams where appropriate and show your calculations. Unsupported answers will receive no marks. It is the explanation that is important.

A2-1. Suppose the consolidated balance sheet of an economy where the public holds all its money in the form of bank deposits is shown in the following table. If the banking system is originally in equilibrium and then the economy's central bank sells 50 worth of government bonds to the banking system, immediately after the transaction there is no change in the money supply, but after the banking system has returned to equilibrium, the money supply is reduced by 1000. [Hint: Use two additional balance sheets in your answer.] Assets: Liabilities: Reserves 100 Deposits 2000 Government Bonds 300 Loans Outstanding 1800 Capital 200 Total 2200 Total 2200