Question

1. Assuming that banks do not hold any excess reserves and people do not want to increase their holdings of currency (bills and coins),

a. What would happen when the FED sells a treasury bill worth $100 to Bank of America? (utilize T-accounts for the FED and Bank of America to answer this question)

b. If the required reserve ratio is 5%, by how much would total deposits contract when the FED sells that treasury bill to Bank of America?

c. By how much would the monetary base be affected by the open market sale? Explain your answer

Answer 1

a. As banks have no excess reserves with them and FED selles tresury bills to them then they will ask people to give cash them back for that purpose they to increase rate of intereest rate so people will be motiveted for this and cash funds will be available to them and FED's treasury bills can be purchased.\

b. 5% of 100

c. open market operation is the way to control over money supply. It depends on the government pilicy that how much amount of money they want to keep in money supply.Monetary base can be affected by open market operations up to a less extend only. Majorly it is affected by CRR,SLR<RR,RRR etc