3. Working through an open-market operation Assume that the following balance sh

Question

3. Working through an open-market operation Assume that the following balance sheet portrays the state of the banking system. The banks have no excess reserves Assets Total reserves Loans Securities Total Liabilities and Net Worth $10 billion 5 billion 10 billion $25 billion Checkable Deposits $25 billion Total $25 billion What is the required reserve ratio? O 1090 O 5% O 25% O 40% Suppose the Federal Reserve buys $3 million of bonds from a bond dealer, who immediately deposits the funds in her checking account. What is the initial impact of this transaction? O The banking system's holdings of securities fall by $3 million and the banking system's total reserves rise by $3 million. O Checkable deposits rise by $3 million and the banking system's total reserves rise by $3 million. O The banking system's holdings of securities rise by $3 million and the banking system's total reserves fall by $3 million. O Checkable deposits rise by $3 million and the banking system's holdings of securities rise by $3 million

Explanation / Answer

Ans:

1) Required reserve ratio = $10 billion / $25 billion

= 0.4 or 40%

2) The banking system holding of securities rise by $3 million and the banking systems total reserves fall by $3 million.

The initial effect of the purchase of bonds by federal reserve is that securities rise by $3 million and total reserves fall by $3 million.

3) Rise by as much as $3 million.

The federal reserves purchase of $3 million bonds will increase checkable deposits in the banking system by as much as $3 million.   

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