Suppose that the Fed purchases from bank A some bonds in the open market and tha

Question

Suppose that the Fed purchases from bank A some bonds in the open market and that, before the sale of bonds, bank A had no excess reserves.

a) Describe what initially happens to the reserves of bank A.

b) If bank A does not want to hold excess reserves, what will it do with the additional money received from the sale of bonds to the Fed?

c) Why do we expect, at least in usual times, that the amount of checking deposits in the economy will go up?

d) Now suppose that the minimum required reserve ratio for banks is 1/10. Also suppose that banks hold no excess reserves and that currency in circulation is unchanged from the purchase of bonds. If the Fed buys $20 billions of bonds from bank A, what will be the increase in checking deposits?

Explanation / Answer

Fed policy for the changing in the money policy, so their changing in the money supply will altering the bank reserve.The Fed uses monetary policy to influence economic activity. But the Fed does not have direct control over the pace of economic growth. Rather, it uses policy tools to accomplish this task. That should be happened intially.

create a response in business investment activity and consumer borrowing. Lower interest rates reduce the cost and increase the profitability of borrowing through the present value calculation. The same holds for the consumer, who will see a reduction in monthly payments for new loans taken out or for those loans adjusted to falling market interest rates.

This will happen when the rise in the supply of the reserve then the interest rate will decreases this will effect on the economy will goes up.

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