Suppose the commercial banks keep no excess reserves, and people deposit all the money they receive into the banking system. Suppose the required reserve ratio is 0.2. Suppose the Federal Reserve wants to increase the monetary base by $1,000,000.
(a) How will the Fed do this?
(b) Show how this will initially affect the balance sheet of Bank of America.
(c) Show how the money expansion process will affect the balance sheets of two more commercial banks, showing the change in the overall money supply at each step.
(d) How much did money supply change as a result of the Fed's actions?
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