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The Federal Reserve sells $100 million bonds to Bank of America.

a.Show the immediate change in the balance sheet of Bank of America due to this transaction

b.Show the immediate change in the balance sheet of the Federal Reserve due to this transaction

c.Consider the unusual scenario that the public holds no currency and that the banks typically like to hold a reserve to deposit ratio of 50%. What is the money multiplier in this case and what will be the change in the money supply as a result of the bond sale?

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019

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Related questions


Suppose Bank A, which faces a reserve requirement of 10 percent, receives a $1,000 deposit from a customer.
a. Assuming that it wishes to hold no excess reserves, determine how much the bank should lend. Show your answer on Bank As balance sheet.
b. Assuming that the loan shown in Bank A’s balance sheet is redeposited in Bank B, show the changes in Bank Bs balance sheet if it lends out the maximum possible.
c. Repeat this process for three additional banks: C, D, and E.
d. Using the simple money multiplier, calculate the total change in the money supply resulting from the $1,000 initial deposit.
e. Assume Banks A, B, C, D, and E each wish to hold 5 percent excess reserves. How would hold this level of excess reserves affect the total change in the money supply?

Suppose Bank A, which faces a reserve requirement of 10 percent,receives a $1,000 deposit from a customer.

a.Assuming that it wishes to hold no excess reserves, determine howmuch the bank should lend. Show your answer on A’s balancesheet.
b.Assuming that the loan shown in Bank A’s balance sheet isredeposited in Bank B, show the changes in Bank B’s balance sheetif it lends out the maximum possible.
c.Repeat this process for three additional banks: C, D, andE.
d.Using the simple money multiplier, calculate the total change inthe money supply resulting from the $1,000 initial deposit.
e.Assume Banks A, B, C, D and E each wish to hold 5 percent excessreserves. How would holding this level of excess resrves affect thetotal change in the money supply.

In the US in 2014, the Federal Reserve increased the monetary base by 350%. The result was an increase in the money supply by 100%.

a) What was the Money Multiplier in 2014?

b) If Americans have a currency ratio of 0.80, what is the desired reserve ratio being held by banks?

c) Presume this scenario is held constant through to today. Then, suddenly American banks drop their reserve ratio to 30%. Explain what impact this would have the rate of inflation.

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