Reference no: EM132360284
Suppose that the T-account for First California Bank is as follows.
Assets Liabilities
Reserves $50,000 Deposits $500,000
Securities 50,000
Loans 400,000
The Bank currently holds the reserves as required by the Fed, and all other banks in the nation do just the same, i.e., hold the exact amount of reserves as required by the Fed.
(1) Suppose that the Fed purchases $20,000 securities from First California Bank, as part of the Fed's resuming "quantitative easing." Draw the new T-account for First California Bank right after the Fed's purchase.
Assets Liabilities
Reserves $70,000 Deposits $500,000
Securities $30,000
Loans $400,000
(2) Suppose that all banks, including First California Bank, continue to holds the exact amount of required reserves. As a result of the Fed's purchase of $20,000 securities from First California Bank, how much of money supply will change? Is the change in money supply an increase or a decrease? The reserves increased by $20,000 and we know that has an effect on money supply, which is the quantity of money available to the economy. Each new dollar held as currency increases the money supply by $1.
Can you please check my answers, and show me the correct way if something is wrong I don't feel confident I answered this correctly.