The Federal Reserve has just purchased $100 million in Treasury bills from comme

Question

The Federal Reserve has just purchased $100 million in Treasury bills from commercial banks.

b. 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 5%, and banks hold no excess reserves, by how much will deposits in the commercial banks change?

c. By how much will the money supply change? Describe the final changes to the T-account for commercial banks when the money supply changes by this amount.

Explanation / Answer

The Federal Reserve has just purchased $100 million in Treasury bills from commercial banks.

If the public holds a fixed amount of currency.

The minimum reserve ratio is 5%, and banks hold no excess reserves,

i.e $5

a)the commercial banks can change in deposite is $95.

b)after reserve the $95 will rotates in form of loan & deposite.

the final account is of 100$ for commercial banks

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