Can anyone answer that question for me please??? Q: If the Fed bought $3.5 billi
ID: 2664578 • Letter: C
Question
Can anyone answer that question for me please???Q:
If the Fed bought $3.5 billion in government securities and the public withdrew $2.0 billion from their transactions deposits in the form of cash, by how much would the monetary base change? By how much would financial institutions' reserves change? By how much would financial institutions' required reserves change if all proceeds from bond sales and all withdrawals from transactions accounts were deposited in or taken from accounts subject to a 10 percent reserve requirement? By how much would depository institutions' net excess reserves change?
Explanation / Answer
Assuming the banks replenished their cash stock; the bank reserve account would have been increased by the $3.5 billion purchase of government securities and decreased by the $2 billion payment for the Federal Reserve note issuance. The monetary base, comprised of Federal Reserve notes outstanding, bank reserve accounts, and Treasury and foreign bank deposits and Treasury coin would increase by $3.5 billion, the amount of the purchase of government securities. The purchase of cash is a wash, netting increases in Federal Reserve notes and decreases in bank reserve accounts to pay for the currency.