Read the question carefully The following are balance sheet items for two entities: the Central Bank...

Read the question carefully

The following are balance sheet items for two entities: the Central Bank and A Commercial Bank.

Central Bank: Discount Loans $42, Currency $72, Government Securities $66, Bank Capital: $12, and Reserves $24

Commercial Bank: Checkable Deposits $120, Government Securities $96, Loans $60, Bank Capital $18, Reserves $24, Borrowings (from Central Bank) $42

The reserve requirement is 15%.

a) Build a Balance Sheet for each bank. If the Central Bank buys $3 in securities to the Commercial Bank, explain in words what happens to each balance sheet category initially.

b) Calculate the effect of the Central Bank buying $3 in securities on the money supply. [Note: we use the initial numbers to do the money multiplier calculation.]

c) Is there an alternative way the Central Bank could achieve the same effect on the money supply as in part b)? If so, provide an example, if not, briefly explain why not.

Expert Solution

Rahul Sunny answered 1 year ago

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