Question

Examine the following T-account for a bank to answer questions 13 to 16. Assume a 10% minimum reserve requirement.

Assets	Liabilities + Net Worth
Reserves $500	Deposits $5000
Bonds $1000
Loans ????	Net Worth $1000

Suppose the Fed wanted to increase the money supply by $1000 and will do so through open market operations. Assuming the money multiplier is in effect, what will the new value of bonds be in the T-account at this bank?

Continuing from the previous question, what will the new value of reserves be in the T-account at this bank?

Answer 1

a)If there is 10% reserve requirement, then the table is filled as below

Assets	Amount	Liabilities	Amount
Reserves	500	deposits	5000
bonds	1000	net worth	1000
loans	4500
total	6000	total	6000

b) If now the Fed decides to increase the money supply by bonds, then it would be buying the bonds. This is because when it would buy the bonds, it needs to pay money and this money would hence increase the money supply.

So the bonds would become zero and the reserves would increase by $1000.

This is shown as below

Assets	amount	liabilities	amount
Reserves	1500	deposit	5000
loan	4500	net worth	1000
total	6000	total	6000