Can you only answer questions 3 and 5, the other problem answers are provided QU
ID: 1114475 • Letter: C
Question
Can you only answer questions 3 and 5, the other problem answers are provided
QUESTION 1
Assets
Liabilities
Reserves $100
Loans 800
T-Bills 100
Deposits $1,000
Refer to this scenario for all of the questions on this problem set.
Suppose the balance sheet shown is for the only bank in the banking system. The reserve requirement is 10%.
If the Fed buys $50 worth of T-bills from this bank, immediately after that exchange, before the bank expands its lending in response, the bank's reserves would equal ___150___
QUESTION 2
Assets
Liabilities
Reserves $100
Loans 800
T-Bills 100
Deposits $1,000
Immediately after the Fed buys the securities, but before the bank expands its lending in response, the bank's excess reserves would equal ___50__.
QUESTION 3
In the initial balance sheet, Excess Reserves were equal to zero. Thus, as a result of the Fed's purchase of $50 of T-bills, the initial change in Excess Reserves = _____________?
Once the banking system has fully responded to this change in reserves, the ultimate change in lending = the initial change in Excess Reserves x (1/rr) = ._______________?
QUESTION 4
As a result of the Fed's purchase of $50 of T-bills, once the banking system has fully responded to the change in reserves, the ultimate change in deposits = initial change in Reserves x (1/rr) = ._____500_____
QUESTION 5
How will the bank's balance sheet look once it has expanded its lending to the point where excess reserves are again equal to zero? Start with the original balances given in the first question, then add the changes to the relevant accounts that you computed in the preceding questions. For example, the 'Deposits' account started out with a balance of $1,000. The new balance = $1,000 + the Maximum Change in Deposits you computed above.
Reserves $100 + =
Loans 800 + =
T-Bills 50
Assets
Liabilities
Reserves $100
Loans 800
T-Bills 100
Deposits $1,000
Explanation / Answer
(3)ANSWER
When the Federal Reserve buys $50 in Treasury bills from commercial banks, itsassets increase by $50 (it now owns $50 in Treasury bills) but its liabili-ties also increase by $50 million as it credits the banks’ accounts at the Federal Reserve,. From the perspective of commercial banks, their assets fall by$50 because they sell Treasury bills to the Fed, but their assets also rise by $50 when their deposits at the Fed are credited with $50
In the initial balance sheet, Excess Reserves were equal to zero. Thus, as a result of the Fed's purchase of $50 of T-bills, the initial change in Excess Reserves= $ 50
Once the banking system has fully responded to this change in reserves, the ultimate change in lending = the initial change in Excess Reserves x (1/rr)= $50*(1/0.1)= $500
(5) ANSWER
After the Federal Reserve buys $50 from banks, the banks areholding $50 in excess reserves. Since the banks do not want to hold any excessreserves, they will increase loans and deposits by $500 , the maximum amountthat $50 in reserves can support. Therefore, the money supply will alsoincrease by $500
The balance sheet after caluclating the excess reserves looks like below mentioned;
assets liabilities reserves $100+$50=$150 Deposits $1000+$500=$1500 Loans $800+ $ 50= $850 Tbills $100-$50 = $50