Question

26. The central bank sells $20,000 worth of bonds in the open market to Katherine, who withdraws cash from her checking account at MAE Bank to pay for the bonds. The banking system has limited reserves, the required reserve ratio is 20%, and banks do not hold excess reserves. a. What is the amount by which MAE Bank's liabilities change as a result of Katherine's cash withdrawal? Explain. b. Calculate the change in required reserves for MAE Bank as a result of Katherine's cash withdrawal. Show your work. c. Have Katherine's financial asset holdings increased, decreased, or stayed the same? Explain. d. Based on the central bank's open market sale of bonds, calculate the maximum amount by which the money supply can change throughout the banking system. Show your work. e. How will the change in the money supply in part (d) affect unemployment and the price level in the short run? Explain.

          26. The central bank sells $20,000 worth of bonds in the open market to Katherine, who withdraws cash from her checking account at MAE Bank to pay for the bonds. The banking system has limited reserves, the required reserve ratio is 20%, and banks do not hold excess reserves.
a. What is the amount by which MAE Bank's liabilities change as a result of Katherine's cash withdrawal? Explain.
b. Calculate the change in required reserves for MAE Bank as a result of Katherine's cash withdrawal. Show your work.
c. Have Katherine's financial asset holdings increased, decreased, or stayed the same? Explain.
d.  Based on the central bank's open market sale of bonds, calculate the maximum amount by which the money supply can change throughout the banking system. Show your work.
e. How will the change in the money supply in part (d) affect unemployment and the price level in the short run? Explain.

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