Question

Suppose that JPMorgan Chase sells $300 million in Treasury bills to the Fed. a. Use T-accounts to show the immediate impact of this sale on the balance sheets of JPMorgan Chase and the Fed. (Enter your responses as integers. Include a minus sign to indicate a negative change, but do not include a plus sign for a positive change.) JP Morgan Chase Bank Assets Liabilities Securities million Reserves million Federal Reserve Assets Liabilities Securities million Reserves million b. Suppose that before selling the Treasury bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 20%. Suppose that JPMorgan Chase makes the maximum loan it can from the funds acquired by selling the Treasury bills. Assume that the loan was made to a JP Morgan Chase customer and deposited into his or her account. Use a T-account to show the initial impact of granting the loan on JPMorgan Chase's balance sheet. (Enter your responses as integers. Include a minus sign to indicate a negative change, but do not include a plus sign for a positive change.) JP Morgan Chase Bank Assets Liabilities Loans smilion Checkable Deposits s million c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that the person receiving the check deposits it in Wells Fargo Bank. Show the effect of these transactions on the balance sheets JPMorgan Chase and Wells Fargo after the check has been cleared. (Enter your responses as integers. Include a minus sign to indicate a negative change, but do not include a plus sign for a positive change.) JP Morgan Chase Bank Enter your answer in each of the answer boxes.

Answer 1

Hi,

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Question:

Answer:

a). Answer:

JPMorgan Chase sells $300 million in Treasury bills to the Fed.

So, its will increase affect the securities and reserve of the Fed and JPMorgan Chase both.

Impact on JPMorgan Chase:

Securities (reduce) = - $300 million

Reserve (increase) = $300 million

Impact on Fed Chase:

Securities (increase) = $300 million

Reserve (decrease) = - $300 million

b). Answer:

Reserve ratio = 20%

JPMorgan Chase sells $300 million in Treasury bills to the Fed so it will increased the reserve of JPMorgan Chase by $300 million

Because reserve ratio is 20% so, JPMorgan Chase is required to keep $60 million ($300 *20%) with reserve bank.

So,  JPMorgan Chase can lend $240 millions only.

Impact on JPMorgan Chase:

Loan = $240 million

Checkable deposit = $240 million

(bank will deposit the loan amount of $240 million with checkable deposit of the borrower with JPMorgan Chase)

c). Answer:

Impact on JPMorgan Chase:

Reserve = $60 million

Checkable deposit = -$240 million

Impact on Wells Fargo:

Reserve = $48 million (20% of $240 million)

Checkable deposit = $240 million

d). Answer:

Change in the Money Supply=Money Multiplier*Change in Bank Reserves

Money Multiplier = 1/Reserve Ratio

= 1/20% = 5

Change in the Money Supply = 5*300 = $1500 million

Thank You