Question

The FOMC has instructed the FRBNY Trading Desk to purchase $450 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 9 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 full effect of this purchase on bank deposits and the money supply if borrowers return only 91 percent of these funds to their banks in the form of transaction deposits?

a.		in bank deposits and money supply		billion billion
b.		in bank deposits and money supply

Answer 1

a.

Purchase of US treasury deposits= $450 Million

Current reserve requirement = 9% of transaction deposit

If borrower returns all the funds,hence transaction deposit = 100% * $450 Million = $450 Million

Other deposit = $0

Increase in bank deposit and Money supply =

=>(1/9%)*450+0

=>$5000 million or $5Billion

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b.

Purchase of US treasury deposits= $450 Million

Current reserve requirement = 9% of transaction deposit

If borrower returns 91% of all  the funds,hence transaction deposit = 91% * $450 Million = $409.5 Million

Other deposit = $450 Million-$409.5 Million = $40.5 million

Increase in bank deposit and Money supply =

=>(1/9%)*409.5 + 40.5

=>$4590.50 million or $4.5905 billion

a.	Increase In	bank deposits and money supply	$5 Billion
b.	Increase In	bank deposits and money supply	$4.5905 Billion