a) Suppose that we have the same banks and the same people as given in the Topic 9 slides (and Section 9.4 of the textbook) but now suppose that the central bank purchases a $10,000 bond from Tian and that each commercial bank now holds 20% of any deposits as reserves. Write down the amount of deposits in each of the Bank of Alexandria, Olympia Bank, Colossus Bank, and the Artemis & Apollo Bank. Now calculate by how much the quantity of money supplied will increase or decrease if we continued on through more and more transactions.
b) Explain what kind of monetary policy the central bank was using in part a). Also, explain what kind of situation the economy was likely to have been in for them to pursue such policy and how the policy works to remedy the economic situation.
c) Give two examples of why the total quantity of money supplied might not change by as much as you calculated in part a).