How would you expect discount to affect the balance sheet

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Reference no: EM131975726

Problem

a) Show the changes to the balance sheets for commercial banks when the Federal Reserve buys $50 million in US Treasury Bills. If the public holds a fixed amount of currency ( so that all loans create an equal amount of deposits in the banking system), the minimum reserve requirement is 5%, by how much will checkable bank deposits in commercial banks change?

b) Now suppose that the Fed raises the discount rate significantly. How would you expect this to affect the balance sheet of local banks? Is this likely to decrease or increase M1?

Reference no: EM131975726

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