Reference no: EM132781650

Question - Suppose that JPMorgan Chase sells $100 million in Treasury bills to the Fed.

a. Use T-accounts to show the immediate impact of this sale on the balance sheets of JPMorgan Chase and the Fed.

b. Suppose that before selling the Treasury bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 20%. Suppose that JPMorgan Chase makes the maximum loan it can from the funds acquired by selling the Treasury bills. Use a T-account to show the initial impact of granting the loan on JPMorgan Chase's balance sheet. Also include on this T-account the transaction from part (a).

c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that the person receiving the check deposits it in Wells Fargo Bank. Show the effect of these transactions on the balance sheets of JPMorgan Chase and Wells Fargo after the check has been cleared. (On the T-account for JPMorgan Chase, include the transactions from parts (a) and (b).)

d. If currency in circulation is $400 billion, total reserves of the banking system are $600 billion, and total checkable deposits are $2,100 billion, what is the maximum increase in the money supply that can result from the transaction in part (a). (That is, the maximum increase after all actions resulting from the transaction in part (a) have occurred)?