The average balance of US Treasury Deposit in 1995 at the Fed was $5 billion. Ho

Question

The average balance of US Treasury Deposit in 1995 at the Fed was $5 billion. However, in 2 weeks in June, due to the additional income tax collected from public, that balance increased to $14 billion before coming back to $5 billion

1) Write the T-account of the Fed to illustrate the change of the level of reserves in June.

2) Assume the Fed does nothing, use the Federal Funds Market to illustrate the change of the federal funds rate.

3) What should the Fed do to keep the level of reserves constant in June? Repo or Reverse-Repo? Explain.

Explanation / Answer

US Treasury deposit T acoount can be summarized as In Billions Debit Credit Balance at beginning 5 Collection from income tax 14 Usage of funds 14 Balance at end 5

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