Suppose that the T-account for First California Bank is as follows.The required reserve ratio is 10%. Suppose that the Fed buys $20,000 securities from First California Bank. As a result of the Fed’s purchase of $20,000 securities from First California Bank,how much of money supply will change? Is the change in money supply anincrease or a decrease? The image presents a simplified balance sheet featuring assets and liabilities, often used in educational settings to illustrate basic financial concepts.**Assets:**1. **Reserves**: $80,0002. **Securities**: $50,0003. **Loans**: $370,000**Liabilities:**1. **Deposits**: $500,000**Explanation:**This balance sheet is divided into two main sections:- **Assets** are resources owned by the entity, which in this case include: - **Reserves**: Cash or equivalent holdings of $80,000 set aside for liquidity or emergency purposes. - **Securities**: Investments in financial instruments amounting to $50,000. - **Loans**: Amount given out as loans, totaling $370,000, expected to bring future returns.- **Liabilities** are obligations or debts the entity owes, with this instance showing: - **Deposits**: Total customer deposits amounting to $500,000, representing the bank's liability to return these funds to depositors.A balance sheet like this shows that the entity's total assets are expected to equal its total liabilities.

Answered: Suppose that the T-account for First…

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Suppose that the T-account for First California Bank is as follows. The required reserve ratio is 10%. Suppose that the Fed buys $20,000 securities from First California Bank. As a result of the Fed’s purchase of $20,000 securities from First California Bank, how much of money supply will change? Is the change in money supply an increase or a decrease?

The image presents a simplified balance sheet featuring assets and liabilities, often used in educational settings to illustrate basic financial concepts.

**Assets:**
1. **Reserves**: $80,000
2. **Securities**: $50,000
3. **Loans**: $370,000

**Liabilities:**
1. **Deposits**: $500,000

**Explanation:**

This balance sheet is divided into two main sections:

- **Assets** are resources owned by the entity, which in this case include:
- **Reserves**: Cash or equivalent holdings of $80,000 set aside for liquidity or emergency purposes.
- **Securities**: Investments in financial instruments amounting to $50,000.
- **Loans**: Amount given out as loans, totaling $370,000, expected to bring future returns.

- **Liabilities** are obligations or debts the entity owes, with this instance showing:
- **Deposits**: Total customer deposits amounting to $500,000, representing the bank's liability to return these funds to depositors.

A balance sheet like this shows that the entity's total assets are expected to equal its total liabilities.

Expert Solution

Step 1: Defining monetary policy tools

The monetary policy tools adopted by Fed to increase or decrease liquidity include the purchase or selling securities on the open market, increasing or decreasing the discount rate and federal fund rate, establishing reserve requirements, and financing through overnight repurchase agreements.

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