1. Suppose Fred deposits $8,000 in cash into his checking account at the Bank of Bonzo. The Bank of Bonzo has no excess reserves and is subject to a 5 percent required reserve ratio.

a. Show this transaction in a T-account for the Bank of Bonzo.

b. Assume the Bank of Bonzo makes the maximum loan possible from Fred’s deposit to Clarice and show this transaction in a new T-account.

c. Clarice decides to use the money she borrowed to take a trip to Tahiti. She writes a check for the entire loan amount to the Tropical Paradise Travel Agency, which deposits the check in its bank, the Iceberg Bank of Barrow, Alaska. When the check clears, the Bonzo Bank transfers the funds to the Iceberg Bank. Show these transactions in a new T-account for the Bonzo Bank and in a T-account for the Iceberg Bank.

d. What is the maximum amount of deposits that can be created from Fred’s initial deposit?

e. What is the maximum amount of loans that can be created from Fred’s initial deposit?

2. What are the three tools the Fed can use to change the money supply? Briefly describe how the Fed can use each of these tools to either increase or decrease the money supply.