Problem 1: If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? (Assuming 10% required reserve ratio). What will have happened to the level of checkable deposits?
Problem 2: If the Fed buys $1 million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves on the top of 10% required reserve ratio, what is the total increase in checkable deposits? Assume there is no currency in circulation. (Hint: Use T-accounts to show what happens at each step of the multiple expansion process. Or think about the relationship between the reserve and checkable deposit intuitively.)