6. Suppose the Federal Reserve instructs the Trading Desk to sell $850 million o

Question

6. Suppose the Federal Reserve instructs the Trading Desk to sell $850 million of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks. What happens to the liquidity of the banking system? 7. A recent headline in Reuter's read as follows: China's central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months The People's Bank of China (PBOC) lowered the reserve requirement ratio (RRR) for all banks by 100 basis points to 18.5 percent,.. Explain what impact this policy change would have on the balance sheet of PBOC and the commercial banks.

Explanation / Answer

6)Federal reserve sysytem:
Trading securites(db) 850mn (Asset)
Reserve amount at dealers banks(cr) 850mn (Liability)
Banks:
Reserve amount at federal reserve(db) 850mn(Assets)
Securities dealers demans deposit at banks (cr) 850mn (Liabilites)
The liquidity will get reduced in the banking system

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