Question

The balance sheet below shows the change in the balance sheet for Commercial Banks shows the final change after the completion of a chain of actions by banks following the Fed Open-Market Operation. Balance Sheet of Commercial Banks (millions) Assets Liabilities + Net Worth A Reserves with Fed +$80 A Deposits +$600 A T-Bills -$80 A Loans +$600 A Liabilities +$600 A Net Worth A Assets +$600 A Liabilities + Net Worth +$600 (a) The Required Reserve Ratio is 0.10. Do Commercial Banks hold insufficient, required, or excess reserves? (b) Did the open-market operation have the full intended effect? Explain.

Answer 1

1) Required reserve = 0.10 * 600 = 60; Actual reserve = 80
Thus excess reserve = 80 - 60 = 20
2) Multiplier = 1/rr = 1/0.10 = 10
If the bank has put the excess resrves to increase the money supply, itt would be have increased to an extent if 10 * 20 = 200. However it is not in the current situation; thus the open-market have not full intended impact.