Question

Show the changes to the t-accounts for the federal reserve and for commercial banks when the federal reserve buys $50 million in u.s. treasury bills. if the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves.

Answer 1

When the Federal Reserve buys $50 million in Treasury bills from commercial banks, itsassets increase by $50 million (it now owns $50 million in Treasury bills) but its liabili-ties also increase by $50 million as it credits the banks’ accounts at the Federal Reserve,part of the monetary base. From the perspective of commercial banks, their assets fall by$50 million because they sell Treasury bills to the Fed, but their assets also rise by $50million when their deposits at the Fed (reserves) are credited with $50 million.Initial changes to the T-account of the Federal Reserve immediately after the Fed pur-chase of $50 million in Treasury bills:Initial changes to the T-account of commercial banks immediately after the Fed pur-chase of $50 million in Treasury bills:After the Federal Reserve buys $50 million from commercial banks, the banks areholding $50 million in excess reserves. Since the banks do not want to hold any excessreserves, they will increase loans and deposits by $500 million, the maximum amountthat $50 million in reserves can support. Therefore, the money supply will alsoincrease by $500 million.Total changes to the T-account of commercial banks after the Fed purchase of$50 million in Treasury bills:13.Show the changes to the T-accounts for the Federal Reserve and for commercial bankswhen the Federal Reserve sells $30 million in U.S. Treasury bills. If the public holds afixed amount of currency (so that all new loans create an equal amount of checkablebank deposits in the banking system) and the minimum reserve ratio is 5%, by howmuch will checkable bank deposits in the commercial banks change? By how muchwill the money supply change? Show the final changes to the T-account for the com-mercial banks when the money supply changes by this amount.AssetsLiabilitiesTreasury bills−$50 millionCheckable deposits+$500 millionReserves+$50 millionLoans+$500 millionAssetsLiabilitiesTreasury bills−$50 millionNo changeReserves+$50 millionAssetsLiabilitiesTreasury bills+$50 millionMonetary base+$50 millionS-194MACROECONOMICS,CHAPTER 14ECONOMICS,CHAPTER 30S187-S198_Krug2e_Macro_PS_Ch14.qxp2/25/098:02 PMPage S-194