Describe how changes in the Fed’s major policy tool (open-market operations) leads to expansionary and restrictive monetary supply.
Following are the consolidated balance sheets of the commercial banks. Assume that the reserve ratio for banks is 10%. The figures in column 1 show the balance sheets’ condition prior to each of the following five transactions. Place the new balance-sheet figures in the appropriate columns and complete A, B, C, D, and E for each column. Start each part (2–6) with the figures in column 1. All figures are in billions of dollars.
|
(1) |
(2) |
(3) |
(4) |
(5) |
(6) |
|
Assets: Reserves $ 50 Securities 70 Loans 90 Liabilities: Checkable deposits 200 Loans from Federal Reserve 10 A. B. C. Change in M1 D. How much more can M1 change? E. C + D total |
$_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ |
$_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ |
$_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ |
$_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ |
$_____ _____ _____ _____ _____ _____ _____ _____ _____ _____ |
(a) Show in column 2 the initial results of the Federal Reserve selling $3 billion in securities to the public which pays by checks.
(b) Show in column 3 the initial results of the Federal Reserve buying $4 billion in securities from the commercial banks.
(c) Show in column 4 the initial results of the Federal Reserve raising the reserve ratio to 20%.
(d) Show in column 5 the initial results when the U.S. Government buys $5 billion worth of goods from American businesses with checks from the U.S. Treasury account at the Federal Reserve Banks and the businesses immediately deposit these checks in their commercial banks.
(e) Show in column 6 the initial results when the Federal Reserve raises the discount rate which causes commercial banks to repay $6 billion in loans owed to the Federal Reserve.
Step by step
Solved in 2 steps
