10. Working through an open-market operation Aa Aa Assume that the following T-a

Question

10. Working through an open-market operation Aa Aa Assume that the following T-account portrays the state of the banking system. The banks currently have no excess reserves Assets Total reserves Loans Securities Total Liabilities $5 billion 25 billion 30 billior $60 billiorn Checkable deposits $50 billion Total $50 billion What is the reserve ratio? 5% 40% 2596 10% Suppose the Federal Reserve (the "Fed") sells $4 million of U.S. Treasury bills to a commercial bank. what is the initial impact of this transaction? The banking system's checkable deposits fall by $4 million The banking system's holdings of securities fall by $4 million The banking system's holdings of securities fall by $4 million, and the banking system's total reserves rise by $4 million The banking system's holdings of securities rise by $4 million, and the banking system's total reserves fall by $4 million As a result of the Fed's sale of $4 million of securities, checkable deposits in the banking system can potentially by as much as increase decrease

Explanation / Answer

1) 10% is the answer

Here we have to check the CRR againist net liabilities, Securities cant be considered as reserve requirement and loans are not considered only cash reserves and considered

2) 4 is the option

Here fed is selling and banks are buying the debt, That means banks securities have increased, This also means that reserves of bank has decreased by 4 million

3) Increase as much as 4 million

Because bank has no cash for itself it has cash from the customers, It takes cash from customers checking account

4) Increase

4 million

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