1. Assume the money supply (M) is $1,200 billion, bank deposits (D) are $800 billion and the required reserve ratio is 10%. What would the Fed have to do (in terms of open market operations) to lower the money supply by 5%? Explain. (Note assume that there are no excess reserves.)
2. Consider the initial situation in the problem above. Suppose that the Fed wanted to increase the money supply by 10%. What should it do in terms of open market operations? Explain.