Question

With T-Accounts (like the ones below), show the immediate effect of a $1000 Open Market Purchase by the Fed from a member of the public who deposits the Fed’s payment into a checking account at the AAA Bank.

Answer 1

Please note that since the question is asking for 'immediate' change,we are assuming that banks do not loan out the reserves 'immediately'. In that case, the change in the bank's balance sheet will be as follows-

But if we assume that the banks do loan out the increased reserves, then the situation would be as follows-

As the bank gets $1000 more from the public, its liabilities in terms of deposits increase by $1000. At the same time, the bank gets assets in terms of loans and reserves. Since the reserve requriements are 5%, it means they will keep a reserve of 5%*1000=$50. The rest bank will loan out so loans will increase by $950. Hence, the t-account will look like this.

Now the fed. The interesting thing about fed is that the currency that banks consider their assets, is actually a liability for the fed. So, when fed gives out 1000 to buy the security/bond, it actually increases its liability by 1000- by increasing the currency in circulation. So, its T-account would look like the following