Blank options: 1. increase or decrease 2. deposits, net worth, loans, reserves,

Question

Blank options:

1. increase or decrease

2. deposits, net worth, loans, reserves, building and furniture

3. 200 thousand, 10 thousand, 400 thousand, 190 thousand

4. decrease or increase

5.  deposits, net worth, loans, reserves, building and furniture

6. increase or decrease

7. 150 thousand, 190 thousand, 180 thousand, 0

8. decrease or increase

9. 50 thousand, 200 thousand, 20 thousand, 10 thousand

The blanks in the box are fill in so there aren't any options

10. 400 thousand, 1 million, 4 million, 3.8 million

Explanation / Answer

The open market operation is the most important method that the Fed uses to influence the supply of money. The Fed in order to increase the supply of money, the FOMC tells the trading desk at the Federal Reserve Bank in New York to buy U.S. government securities from the public in the nation’s bond market. The sellers of the bond will likely to deposit their fund in the bank. The bank only has to hold the fraction of the new deposit as required reserve and the excess is the excess reserve, this increases the excess reserve of the bank.

The bank loan out this excess reserve to a borrower and increase the borrower’s checking deposit at the Bank. The borrower then spends the new fund to purchase something and writes a check in the name of his seller. The seller deposits the new fund at his bank which increases the excess reserve of that bank and the whole process continues. This way the initial increase in money gets multiplied and increases the money supply by the multiplier times of initial increase in money supply.

The assets of a bank are the items of value that the bank owns, including loans, reserves and secuirities. The liabilities of a bank are the financial obligation that the bank has to other people including deposits and banks capital.

Therefore, the correct options are:

1. increase

2. deposits

3. 200 thousand

4. increase

5. reserves

6. 200 thousands

7. increase

7. 190 thousand

8. increase

9. 10 thousand

?The table is completed as below???

This process will continue to increase the money supply by the multiplier times of the initial deposit. The multiplier is reciprocal of reserve requirement. In this case the reserve requirement is 0.05 and hence the multiplier is 1/0.05=20. Then the increase in money supply is 20 times of $200,000 or $4 million.

Therefore, the correct options are:

Banks Increase in deposits Increase in required reserve Increase in loans First $ 200,000.00 $ 10,000.00 $ 190,000.00 Second $ 190,000.00 $    9,500.00 $ 180,500.00 Third $ 180,500.00 $    9,025.00 $ 171,475.00

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