13. The public is initially holding currency equal to $800 and deposits equal to

Question

13. The public is initially holding currency equal to $800 and deposits equal to $400. Banks are holding only required reserves and the required reserve ratio is 10%. Banks also hold $220 in loans and $140 in securities.

a. Illustrate the banking sector’s balance sheet.

b. The Federal Reserve conducts a $100 open market purchase of securities. Illustrate the banking sector’s balance sheet immediately following the operation (before banks have a chance to convert the proceeds of the operation to securities or loans).

c. Use the simply money multiplier to determine the total value of deposits created after an infinite number of iterations of the deposit creation process (in this case assume the proceeds of all loans are deposited into the banking system).

Explanation / Answer

a)

B) NOw, Federal Reserve conducts a $100 opem market purchase of securities.

$40

C) Total deposit = $400

and we have money multiplier = 1/ required reserved ratio

money multiplier = 10

money supply = 400 * 10 = $4000

Assets Amount Liabilites Amount Required Reserves $40 Deposits $400 Loans $220 Securities $140

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