Question

The FOMC has instructed the FBRNY Trading Desk to purchase $480 million in US Treasury securities....

The FOMC has instructed the FBRNY Trading Desk to purchase $480 million in US Treasury securities. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits. Assume US banks withdraw all excess reserves and give out loans.

A. Assume that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply?

___ in bank deposits and money supply _____ billion.

B. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 94 percent of these funds to their banks in the form of transaction deposits?

____ in bank deposits and money supply ____ billion.

Homework Answers

Answer #1

Answer : (a.) By Assumig that borrowers eventually return all of these funds to their banks in the form of transaction deposits there will be INCREASE  in bank deposits and money supply by 6.6 billion i.e [(1 / 0.06) * 480million = 8000 million or 8 billion]

(b.) The full effect of this purchase on bank deposits and the money supply if borrowersreturn only 94 percent of these funds to their banks in the form of transaction deposit is INCREASE  in bank deposits and money supply by 3.3 billion i.e [(1 / {(0.06) + (1 - 0.94)} * 480million = 4000 million or 4 billion]

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The FOMC has instructed the FRBNY Trading Desk to purchase $360 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $360 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 6 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is...
The FOMC has instructed the FRBNY Trading Desk to purchase $770 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $770 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. a. Assume also that borrowers eventually return all of these funds to their banks in the form of transaction deposits. What is the full effect of this purchase on bank deposits and the money supply? b. What is...
Omega Bank has $200 million in transaction deposits on its balance sheet. The Fed's reserve requirement...
Omega Bank has $200 million in transaction deposits on its balance sheet. The Fed's reserve requirement is currently 9 percent of transaction deposits, but they are considering reducing the reserve requirement to 8 percent. Omega withdraws all its excess reserves and that borrowers eventually return all of these funds to Omega in the form of transaction deposits. 1. Find Omega's loan entry on its balance sheet prior to the change in the reserve requirement. Enter you answer in terms of...
1. The three players in the money supply process include A. Banks, depositors and the US...
1. The three players in the money supply process include A. Banks, depositors and the US Treasury B. Banks, borrowers and the Fed      C. Banks, depositors and the Fed D. Banks, depositors and borrowers 2. The monetary base consists of:      A. Currency in circulation and Federal Reserve notes      B. Currency in circulation and the US treasury’s monetary liabilities      C. Currency in circulation and reserves      D. Reserves and vault cash 3. When the Fed wants to...
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion,...
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a)...
A bank has the following assets: Reserves of $15 million; Loans of $150 million; and Securities...
A bank has the following assets: Reserves of $15 million; Loans of $150 million; and Securities of $50 million. Their liabilities include Deposits of $150 million; Borrowed funds of $35 million and Bank Capital of $30 million. If the required reserve rate is 10 percent, answer the following: a. What is the amount of excess reserves the bank is currently holding? b. What are the options available to the bank if customers decide to withdraw $10 million in deposits?
Suppose currency is $500 billion, deposits are $700 billion, the reserve requirement is 10%, and excess...
Suppose currency is $500 billion, deposits are $700 billion, the reserve requirement is 10%, and excess reserves are $10 billion. Calculate the money supply, currency deposit ratio, excess reserve ratio and the money multiplier. Suppose the central bank conducts an open market purchase of $500 billion. Assume the ratios you calculated stay the same, predict the effect on the money supply.
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion,...
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a)...
Provide a brief explanation or show work 1. In the United States, the money supply is...
Provide a brief explanation or show work 1. In the United States, the money supply is determined: a. only by the Fed. b. only by the behavior of individuals who hold money and of banks in which money is held. c. jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. d. according to a constant-growth-rate rule 2. In a 100-percent-reserve banking system, if a customer deposits $100 of...
Bank Three currently has $500 million in transaction deposits on its balance sheet. The Federal Reserve...
Bank Three currently has $500 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 percent of transaction deposits. a. If the Federal Reserve decreases the reserve requirement to 5 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans, and that borrowers eventually return...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT