Question 2: (15 points) A happen in order:- ssume no banks hold excess reserves

Question

Question 2: (15 points) A happen in order:- ssume no banks hold excess reserves initially. The following events l. The Fed buys $100 millions of US Treasury bonds from bank A 2. Bank A bank B and lend out $20M esnthen purchases s80M of government bonds from (electronic money) to person A. en purchases $80M Answer the following questions: a. Write the T-account for the Fed, bank A, bank B and person A. b. C c. Assume th lend out? aiculate the change in the monetary base, money supply (MI) in this scenario e reserve requirement ratio is 10%, what is the maximum amount that bank B can

Explanation / Answer

2. MONEY SUPPLY IS ALL THE CURRENCY OR LIQUID INSTRUMENT CIRCULATING IN ECONOMY INCLUDING BALANCE HELD IN BAN SAVING ACCOUNTS THIS INCLUDE ASSET WHICH ARE EVEN LESS LIQUID

MS = 80 + 20 = 100

MONETARY BASE IS AMOUNT CIRCULATING IN HANDS OF PUBLIC OR HELD BY FED AS A RESERVE INCLUDING PURCHASE/SELL OF GOVT BOND IN OPEN MARKET =80+20 = 100

3. AMOUNT OF CASH BANK B HAVE IS 80MILLION.
RESERVE RATIO IS 10%

BALANCE TO BE RESERVE = 80 M*10% = 8 MILLION

BANK B CAN USE = 80-8 = 72 MILLION

FED PARTICULAR DEBIT CREDIT BOND FROM A $100 M

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