Question

1.5 Use T-accounts to show the initial effects of each of the following actions on the balance sheets of the Fed and the banking system:

a. The Fed increases discount loans by $2 billion.

b. TheFedcarriesouta$2billionopenmarketsale.

c. TheFedspends$100milliononanewinforma- tion technology system for the Federal Reserve Bank of Atlanta from DeShawn’s Computer Services.

Answer 1

The Fed provides the funds to the banks by increasing their reserve accounts. For the Fed, asset rise by $2 billion from the additional discount loan, and liabilities rise by $2 billionfrom the additional bank reserves.

The Federal Reserve uses open market operations to manage the supply of money in the economy and adjust short-term interest rates. This means that the Fed buys or sells some of the government bonds and bills it has issued; this increases or decreases the money supply and, thus, lowers or raises short-term interest rates.