QUESTION 1 Assets Liabilities Reserves $100 Loans 800 T-Bills 100 Deposits $1,00

Question

QUESTION 1

Assets

Liabilities

Reserves        $100

Loans                800

T-Bills               100

Deposits $1,000

Refer to this scenario for all of the questions on this problem set.

Suppose the balance sheet shown is for the only bank in the banking system. The reserve requirement is 10%.

If the Fed buys $50 worth of T-bills from this bank, immediately after that exchange, before the bank expands its lending in response, the bank's reserves would equal ._____________________?

QUESTION 2

Assets

Liabilities

Reserves        $100

Loans                800

T-Bills               100

Deposits $1,000

Immediately after the Fed buys the securities, but before the bank expands its lending in response, the bank's excess reserves would equal -_________________________________________?

QUESTION 3

In the initial balance sheet, Excess Reserves were equal to zero. Thus, as a result of the Fed's purchase of $50 of T-bills, the initial change in Excess Reserves = .________________?

Once the banking system has fully responded to this change in reserves, the ultimate change in lending = the initial change in Excess Reserves x (1/rr) = .__________________________?

QUESTION 4

As a result of the Fed's purchase of $50 of T-bills, once the banking system has fully responded to the change in reserves, the ultimate change in deposits = initial change in Reserves x (1/rr) = ._________________________?

QUESTION 5

How will the bank's balance sheet look once it has expanded its lending to the point where excess reserves are again equal to zero? Start with the original balances given in the first question, then add the changes to the relevant accounts that you computed in the preceding questions. For example, the 'Deposits' account started out with a balance of $1,000. The new balance = $1,000 + the Maximum Change in Deposits you computed above.

Reserves    $100 +    =_________

Loans    800 +   =____________

T-Bills                          50

Assets

Liabilities

Reserves        $100

Loans                800

T-Bills               100

Deposits $1,000

Explanation / Answer

1.

If Fed buys $50 amount of Treasury bill,

Then,

Reserves = 100+50

Reserves = $150

2.

Required reserved for the bank = Required reserve ratio*deposits = 10%*1000 = $100

Excess reserve = total reserve – required reserve = 150-100 = $50

3.

Initial change in excess reserve = 50-0 = $50

4.

Ultimate change in deposits = initial change in reserve*(1/RR ratio)

Ultimate change in deposits = 50/10%

Ultimate change in deposits = $500

Pl. repost other unanswered questions for their proper answers!

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