Question

In: Finance

The FOMC has instructed the FRBNY Trading Desk to purchase $820 million in U.S. Treasury securities....

The FOMC has instructed the FRBNY Trading Desk to purchase $820 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 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 95 percent of these funds to their banks in the form of transaction deposits?

a. (increase or decrease) in bank deposits and money supply billion
b. (increase or decrease) in bank deposits and money supply    billion

Solutions

Expert Solution

a)$16.4 billion

Explanation:

Given that,

Treasury securities purchased = $820 million

Reserve requirement = 5% of the deposits

Therefore,

Transaction Deposits = 100% of 820 = 820

Other Deposits = 0

Increase in bank deposits and money supply:

= (1 / Reserved Requirement) * Transaction Deposits + Other Deposits

= (1 / 5%) * 820 + 0

= 20 * 820

= $16,400 million

= $16.4 billion

Hence, there is an increase in the bank deposits and money by $16.4 billion.

b.

Transaction Deposits = 95% of 820 = 779

Other Deposits = 820 - 779 = 41

Increase in bank deposits and money supply:

= (1 / Reserved Requirement) * Transaction Deposits + Other Deposits

= (1 / 5%) * 779 + 41

= 20 * 779 + 41

= 15580 + 41

= $15,621 million

= $15.62 billion

Hence, there is an increase in the bank deposits and money by $15.62 billion.

Note;

If borrowers spent all funds they borrowed from banks, the deposit multiplier will be applied on 100% money whereas if only 95% is spend in transactions and other 5% is saved or deposited some other way then deposit multiplier will be applied on only 95% money and remaining 5% will not multiply.


Related Solutions

The FOMC has instructed the FRBNY Trading Desk to purchase $450 million in U.S. Treasury securities....
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 FOMC has instructed the FRBNY Trading Desk to purchase $750 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $750 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. 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? What is the full...
The FOMC has instructed the FRBNY Trading Desk to purchase $740 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $740 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 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 FOMC has instructed the FRBNY Trading Desk to purchase $740 million in U.S. Treasury securities....
The FOMC has instructed the FRBNY Trading Desk to purchase $740 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 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...
1-The FOMC has instructed the FRBNY Trading Desk to purchase $430 million in U.S. Treasury securities....
1-The FOMC has instructed the FRBNY Trading Desk to purchase $430 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 10 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...
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The...
Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve. The Banking System's balance sheet will specifically show: a. only an increase in liabilities of $2 billion. b. b. only a decrease in assets of $2 billion. c. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively. d. no net change in assets or liabilities, only a change in...
Suppose that you are the FX trading desk of ExxonMobil with an extra U.S. $1,000,000 to...
Suppose that you are the FX trading desk of ExxonMobil with an extra U.S. $1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810 percent (that's a six month rate) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The 6-month interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your...
Linke Motors has a beta of 1.30, the rate on U.S. Treasury securities is 6.5%. The...
Linke Motors has a beta of 1.30, the rate on U.S. Treasury securities is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 10.75%. Based on the SML, what is the firm's required return? Do not round your intermediate calculations. Group of answer choices 12.03% 14.79% 14.43% 9.86% 14.31%
Suppose the Federal Reserve’s trading desk buys $500,000 in T-bills from a securities dealer who then...
Suppose the Federal Reserve’s trading desk buys $500,000 in T-bills from a securities dealer who then deposits the Fed’s check in Best National Bank. Use a balance sheet to show the impact on the bank’s loans. Consider the money multiplier and assume the required reserve ratio is 10 percent. What is the maximum increase in the money supply that can result from this open market transaction? Please show detailed work
1. The risk premium for an investment. a) Is negative for U.S. Treasury Securities b) Increases...
1. The risk premium for an investment. a) Is negative for U.S. Treasury Securities b) Increases with risk c) Is a fixed amount added to the risk-free return, regardless of the level of risk d) Is zero (0) for risk-averse investors 2. When the stock market took a dive as a result of the recent US recession. a) That is an example of diversifiable risk b) That is an example of systematic risk c) That is an example of company...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT