Show the changes to the T-accounts for the Federal Reserve and for commercial ba

Question

Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves, by how much will deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for commercial banks when the money supply changes by this amount. 

Explanation / Answer

ASSETS

LIABILITIES

Treasury Bills + $50 Million

Monetary Base plus $50Million

The initial changes to the Treasury account of commercial banksimmediately after the Federal Reserve purchase of $50 million inTreasury bills:

ASSETS

LIABILITIES

TreasuryBills        - $50Million

Federal Reserves + $50Million

After the Federal Reserve buys $50 million from commercialbanks, the banks are holding $50 million in excessreserves. The banks do not want to hold any excess reserves sothey will increase loans and deposits by $500 million which is themaximum amount that $50 million in reserves cansupport. Therefore, the money supply will also increase by$500 million.

All changes to the Treasury account of commercial banks afterthe Federal purchase of $50 million in Treasury bills:

ASSETS

LIABILITIES

TreasuryBills        - $50Million

Federal Reserves + $50Million

Loans                    + 500 Million

Checkable deposits    +500 million

ASSETS

LIABILITIES

Treasury Bills + $50 Million

Monetary Base plus $50Million

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