Suppose the banking system has reserves of $750,000, demand deposits of $2,500,000 and a reserve requirement of 20%.
a. If the Fed now purchases $125,000 worth of government bonds from the public, what are the new excess reserves of the banking system (Assume the public deposits the entire $125,000 in demand deposits).
b. How much can the banking system increase the money supply by, given the new reserve position.