The central bank uses the tools of open market operations, the discount window, and reserve requirements to control the money supply in the economy. During the inflationary time, the bank will look to enact contractionary monetary policy, while during downturns, the bank will look to employ an expansionary fiscal policy.
Part 1:
The balance sheet is given as follows:
|
Assets |
Liabilities |
|
Reserves $10 |
Deposits $100 |
|
Loans $70 |
Bond liability $10 |
|
Bonds $20 |
|
|
Cash $10 |
|
By purchasing the bonds from the Wachovia bank, the central bank gives its liquid funds to the bank, and there is now more money circulating in the economy.
Part 2:
The balance sheet is given as follows:
|
Assets |
Liabilities |
|
Reserves $10 |
Deposits $100 |
|
Loans $70 |
The loan from Fed $15 |
|
Bonds $20 |
|
|
Cash $15 |
|
By borrowing from the central bank, Wells Fargo now has more liquid funds to use to make transactions in the economy. This additional sum can be used to make out loans. The money supply has increased.
Part 3:
The balance sheet is given as follows:
|
Assets |
Liabilities |
|
Reserves $20 |
Deposits $100 |
|
Loans $60 |
|
|
Bonds $20 |
|
Due to the increased reserve requirements, the bank now has less money available for profitable uses. They can make out fewer loans with the remaining sum of money. Therefore, there is less money circulating in the economy, and the money supply decreases.
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