Explain and illustrate graphically the effect of the following on the monetary b

Question

Explain and illustrate graphically the effect of the following on the monetary base and the level or reserves in the banking system. Use the T-accounts to illustrate your answer:

a) The Fed sells $200,000 in government bonds to the Bank of America

b) The Fed buys from Chase $30 million of government securities, the required reserve ratio is 10%; individuals do not hold currency, and banks do not hold excess reserves. What will be the maximum increase in the money supply by the banking system as the result of the Fed purchase?

c) If Chase receives an extra $30 million of reserves from the Fed but decided not to lend any of these reserves out. How much deposit creation takes places for the entire banking system? Explain

Explanation / Answer

A) when fed sells $200000 in government bonds to the bank of america, then the effect of monetary base is that moneyary base is reduced by $200000 and reserves also decreased by $200000. Because monetary base is the currency that is either circulated or in the hands of public or in reseves of commercial bank or in centra bank.

B) When fed buys $30 million of government bonds from chase, then it will increase The monetary base by $30 million and money supply will increase by $30 million * multiplier

Multiplier = 1/rrr = 1/0.1 =10

Money supply = 30 million *10 = 300 million

Thus money supply increases to $300 million.

C) if chase recieves an extra $30 million of reserves from the fed but decided not to lend any of these reserves then there will no deposits creation take place for the entire banking system. Because chase kept all $30 million in his reserves.

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