Question a. Third National Bank is fully loaned up with reserves of $30,000 and demand deposits equal to $100,000. The reserve ratio is 5 percent. Households deposit $20,000 in currency into the bank. How much excess reserves does the bank now have, and what is the maximum amount of new money that can be created in the banking system as a result of this deposit? Show all work.
Question b. What is the fed funds rate in the banking system, and explain how the Fed manipulates this rate in order to achieve macroeconomic objectives.