Question

QUESTION 1 0.8 points Saved Assets Liabilities Reserves $100 Loans T-Bills Deposits S1,000 800 100 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

Answer 1

Solution:

Question1:

Given

reserves = $100

loans = $800

T-bills = $100

deposits = $1000

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 ._______

calculation:

If Fed buys $50 amount of Treasury bill,

Then,

Reserves = 100+50

Reserves = $150

Question 2:

Given

reserves = $100

loans = $800

T-bills = $100

deposits = $1000

Immediately after the Fed buys the securities, but before the bank expands its lending in response, the bank's excess reserves would equal -___________

calculation:

Required reserved for the bank = Required reserve ratio*deposits

= 10%*1000

= $100

Excess reserve = total reserve – required reserve

= 150-100

= $50

ie T-bill account balance = $(100 - 50) = $50

Question 3:

explanation:

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

hence,

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