1. Describe what is likely to happen to interest rates, deposits, and total bank
ID: 2666761 • Letter: 1
Question
1. Describe what is likely to happen to interest rates, deposits, and total bank reserves as a result of the transactions listed below:a. The Federal Reserve sells $50 million in securities outright to a bank.
b. The Federal Reserve buys $85 million in securities outright from a bank.
c. The Federal Reserve sells $93 million in securities outright to a nonbank security dealer.
d. The Federal Reserve buys $42 million in securities outright from a nonbank security dealer.
e. The Federal Reserve sells $21 million in securities from its own portfolio to a foreign central bank.
f. The Federal Reserve buys $37 million in securities for its own portfolio that are being offered for sale by a foreign central bank.
g. The Federal Reserve declines the U.S. Treasury’s offer to roll over $150 million in Treasury notes that are maturing in the Fed’s own portfolio in exchange for new Treasury notes; instead the Federal Reserve demands cash from the Treasury.
Explanation / Answer
a. The Federal Reserve sells $50 million in securities outright to a bank.
Due to this interest rates increase because when you are giving loan or sells security you expect higher interest, deposits will increase because if we have to sell we will look to increase the deposits to maintain cash and bank reserves will increase due to cash inflow
b. The Federal Reserve buys $85 million in securities outright from a bank.
Due to this interest rates decrease because when you are getting loan or buy security you expect low interest, deposits will decrease because if we have to buy security we will look to decrease the deposits to maintain cash and bank reserves will decrease due to cash outflow
c. The Federal Reserve sells $93 million in securities outright to a nonbank security dealer.
In this there is no guaranty all ways there is a default risk so interest rates, deposits, and total bank reserves depend on the risk factor
d. The Federal Reserve buys $42 million in securities outright from a nonbank security dealer.
In this there is no guaranty all ways there is a default risk so interest rates, deposits, and total bank reserves depend on the risk factor. So this has mild effect in all situations
e. The Federal Reserve sells $21 million in securities from its own portfolio to a foreign central bank.
When it dealing with foreign central bank one thing we have to take care that is exchange rates and the country policy and procedures. Depending on these interest rates, deposits, and total bank reserves will depend
f. The Federal Reserve buys $37 million in securities for its own portfolio that are being offered for sale by a foreign central bank.
When it dealing with foreign central bank one thing we have to take care that is exchange rates and the country policy and procedures. Depending on these interest rates, deposits, and total bank reserves will depend
g. The Federal Reserve declines the U.S. Treasury’s offer to roll over $150 million in Treasury notes that are maturing in the Fed’s own portfolio in exchange for new Treasury notes; instead the Federal Reserve demands cash from the Treasury.
Due to this interest rates increase, deposits will increase because if we have to sell we will look to increase the deposits to maintain cash and bank reserves will increase due to cash inflow
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