Question

4a) Suppose Thomas National Bank pays back $15M of discount loans. Using t-accounts, illustrate how this will affect the Fed's balance sheet and Thomas National Bank's balance sheet. (4 points) b) How will this affect the monetary base? (3 points)

Answer 1

Answer to 4(a)
Since Thomas National Bank pays back 15M to federal bank we see that it gets credited to Federal reserves balance and debited from Thomas National bank.
In the balance Sheet of Thomas National Bank affect of loan repayment is as under
Assets      =	Liabilities   +	Shareholders' Equity
( $ 15 M) =	( $ 15 M)
Decrease	Decrease
In the balance Sheet of Federal Reserve Bank affect of loan repayment increases cash amount by $15m in the asets side and decreses the balance of loan repayable on the assets side, thereby no change in total assets balance in the Balance Sheet
T accounts are as under-
In the books of Thomas National bank
Loan from federal bank
Date	Description	Amount(in Million)	Date	Description	Amount(in Million)
	Bank	$ 15
	(being loan repaid)
In the books of Federal Reserve Bank
Loan to Thomas National bank
Date	Description	Amount(in Million)	Date	Description	Amount(in Million)
				Bank	$ 15
				(being loan repaid)
Answer to 4(b)
When thomas pays back $ 15m to federal reserve, it will have now less money with himself to lend it to its customer thereby reducing monetary base.
Hence monetary base is reduced.