4. For the following questions, assume no currency is held outside the banking s

Question

4. For the following questions, assume no currency is held outside the banking system and banks desire to hold no excess reserves. The required reserve ratio is 10 A. Use the balance sheet below to show the immediate effects of the Fed selling S200 worth of securities to this What is the immediate effect on the money supply? 10,000 Exc. Debt B. Use the balance sheet below to show the effects after the bank has time to adjust its loan portfolio and level of deposits. Determine the change in the money supply associated with this open market operation. Debt C. Use the balance sheet below to show the immediate effects of the Fed decreasing the required reserve ratio to 5 What is the immediate effect on the money supply? 10,000 Exc. 9,000 Deat 5,000 Capital D. Use the balance sheet below to show the effects after the bank has time to adjust its loan portfolio and level of deposits Determine the change in the money supply associated with this change in the required reserve ratio. Deat

Explanation / Answer

A)

If Fed sells securities to this bank than Securties held with bank will increases and reserves decrease by same amount hence as reserves decrease money supply increases accordingly.

C)

If Fed decreases Reserve ratio to 5% this will give a bank an opportunity to provide more loans that is equivalent to decrease in reserve hence New Reserve will be 500 and New Loans will be 9500.

about Q B & Q D we dont see any figures into balance sheet hence unanswered.

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