Question

SA 1A- Central Bank Policy Suppose the Federal Reserve decides to purchase $125 million in corporate...

SA 1A- Central Bank Policy

Suppose the Federal Reserve decides to purchase $125 million in corporate bonds from First National Bank.

How do the balance sheets for the Fed and First National change after this purchase? What is the change in the monetary base?

Please with explanation

Homework Answers

Answer #1

When the Federal Reserve will be buying the bond between that means, it is trying to increase the money supply into the economy so the overall cash balance of the Federal Reserve will be going down and the Assets of the Federal Reserve going to increase whereas in case of the commercial bank the assets are remaining similar due to cash increasing and value of bonds going down.

It is an exercise by federal reserve in order to stimulate the economy by increasing the money supply and it try to buy the bonds in order to provide the banks with the cash and liquidity and the bank will be providing this money to the public in order to increase the money flow so the cash on the books of banks will be increasing and loanable funds will also increase.

The changes in monetary base will be that the monetary base will be going to increase due to increase in cash and decreasing bonds

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
Suppose the Federal Reserve (Federal Reserve (Fed)) gave First National Bank (FNB) a $ 10 million...
Suppose the Federal Reserve (Federal Reserve (Fed)) gave First National Bank (FNB) a $ 10 million rediscount loan by increasing the bank's Fed account. a) Show the effect of this transaction on the FNB balance sheet. Note that the deposits held by banks at the Fed are part of the bank reserve. B) Assume that the FNB does not have excess reserves before receiving the rediscount loan. How much of the FNB $ 10 million can you loan? C) What...
The Federal Reserve System (called “the Fed”) serves at the Central Bank of the United States....
The Federal Reserve System (called “the Fed”) serves at the Central Bank of the United States. It is responsible for setting and carrying out monetary policy. Congress established the Fed and allows it to operate autonomously, at least with respect to setting and carrying out monetary policy on a day-to-day basis. This autonomy allows the Board of Governors and the Federal Open Market Committee (FOMC) to quickly respond to economic and financial industry problems and take timely action. It also...
National Bank currently has $750 million in transaction deposits on its balance sheet. The current reserve...
National Bank currently has $750 million in transaction deposits on its balance sheet. The current reserve requirement is 12 percent, but the Federal Reserve is decreasing this requirement to 10 percent.      a. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits. (Enter your answers in millions. Do not round intermediate calculations. Round your...
Suppose the Federal Reserve conducts and open market purchase of $800. The nonbank public holds the...
Suppose the Federal Reserve conducts and open market purchase of $800. The nonbank public holds the same fraction of currency relative to deposits. Banks hold the same fraction of excess reserves, and the Fed keeps the reserve requirement unchanged. Compute the change in the monetary base, and the change in the money supply and be sure to indicate the direction of the change in both variables.
National Bank currently has $2,100 million in transaction deposits on its balance sheet. The current reserve...
National Bank currently has $2,100 million in transaction deposits on its balance sheet. The current reserve requirement is 8 percent, but the Federal Reserve is decreasing this requirement to 6 percent. a. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits. (Enter your answers in millions. Do not round intermediate calculations. Round your "Panel...
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...
This exercise utilizes two balance? sheets, one for the Federal Reserve and one for BHZ? Bank,...
This exercise utilizes two balance? sheets, one for the Federal Reserve and one for BHZ? Bank, a representative member of the banking system. Given the following balance sheet showing the? Fed's initial? position, suppose the Federal Reserve wants to raise bank reserves by ?$100 million by transacting with BHZ Bank. (fill in the blanks) THE FEDERAL RESERVE ?(All values in millions of? dollars) Assets Liabilities and Shareholders' Equity Treasury Bonds 1,100 Reserves 1,300 Other bonds 600 Currency 400 Total Assets...
1. The most commonly used tool of monetary policy in the U.S. is the reserve requirement...
1. The most commonly used tool of monetary policy in the U.S. is the reserve requirement commercial banks must keep on hand at the Fed. TRUE/FALSE? 2. Open market operations take place when the central bank sells or buys U.S. Treasury bonds in order to influence the quantity of bank reserves and the level of interest rates. The specific interest rate targeted in open market operations is the discount rate.  TRUE/FALSE? 3. The Federal Reserve System is run by the government,...
Suppose a central bank decides to conduct monetary policy according to a rule for interest rates....
Suppose a central bank decides to conduct monetary policy according to a rule for interest rates. a) How does it choose the basic setting for the interest rate within the rule? b) How would it respond to a rise in the output gap (Y −YP)? c) How would the bank react to an inflation rate higher than its target inflation rate?
Suppose the Bank of England announces contractionary monetary policy while, at the same time, the Federal...
Suppose the Bank of England announces contractionary monetary policy while, at the same time, the Federal Reserve announces a more expansionary monetary policy. Everything else held constant, this would cause the UK pound to________ against the U.S. dollar. Select one: change ambiguously depreciate appreciate remain constant
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT