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1. Create an example involving 4 separate banks and 4 separate people that depicts the money creation process inherent in fractional reserve banking through balance sheets. Assume that the initial injection of cash worth $500 is made by the first person in the first bank and that each bank maintains a 10% reserve ratio.
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a) What are open market operations? Explain how an open market purchase works. Now show the impact of an open market purchase of $500 million worth of bonds by the Fed on the balance sheets of the banking system. Assume a reserve ratio of 10%.
b)Now show the impact on the money supply of an open market sale by the Fed on the banking system worth $200 million, assume a reserve ratio of 8%.