Assume Country Cinderella is having a fractional banking system. The First National Bankacquires $600 000 in new deposits and initially uses part of this to make new loans of $400 000.The T-account of First National Bank showing changes in its assets and liabilities is asfollows:AssetsLiabilitiesChange in Reserves $200 000Change in Loans $400 000Change in Deposits $600 000a) Assume that the Central Bank of Country Cinderella asks its banks to hold 10% of depositsas reserves. How much excess reserves does First National Bank hold? (02 Marks)b) Assume that all other banks hold only the required amount of reserves and that the publicholds no cash. If First National Bank decides to reduce its reserves to only the requiredamount by how much will the economys money supply increase? (03 Marks)
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