Question

In: Economics

The following table shows the initial balance sheets of Bank A and The Federal Reserve (Fed)....

The following table shows the initial balance sheets of Bank A and The Federal Reserve (Fed). Suppose that the Fed then buys $10 million in bonds from Bank A.

a.) What are total assets and total liabilities for Bank A after the transaction? Write down the new balance sheet for Bank A.

b.) Excess reserves are reserves that banks hold beyond what they are required to hold to meet their reserve requirement. Assume that the reserve ratio is 10%. What are excess reserves for Bank A before and after the transaction? What are the pros and cons for Bank A of holding excess reserves?

c.) What are total assets and total liabilities for the Fed after the transaction? Write down the new balance sheet for The Fed

d.) Why would the The Fed conduct such a transaction?

Solutions

Expert Solution

a) Balance Sheet of Bank An after the exchange :

Stores proportion is the % of it's all out stores that the banks are ordered by the FED to hold as stores.

Any additional stores that the banks hold past these commanded saves are named as abundance saves.

So there is no adjustment in the overabundance saves that the bank A holds when this exchange as it's absolute stores didn't change due to the transaction.i.e., it stays at $11 million ($20 million - (10 % of $90 million)

Focal points : The banks have less funding to loan so they cautiously use it to loan to the great quality borrowers

They have higher support on the off chance that their business turns sour

Impediments : It is prompting comparitively less liquidity in the market.

Banks are loosing the chance of capital by not utilizing it for loaning however rather keeping it in as overabundance saves

c.The Total of advantages and liabiliies of the FED after the exchange

d) Fed attempts to buy the bonds from the banks inorder to increment/instigate liquidity into the economy.After this transaction,the banks have increasingly capital left with them to loan to people in general.


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