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Chapter 15: Q.20 (page 410)

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.

Short Answer

Expert verified

The checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank is grows by 2 million dollars.

Step by step solution

01

Concept introduction

A T-account is a casual word for a group of monetary records that utilizesdouble-entry bookkeeping. The word defines the appearance of the bookkeeping access. First, a big note T is sketched on a page

02

Explanation

Checkable Deposits A/cDebitCreditParticularsAmountParticularsAmountBalance2000000Bank200000020000002000000

The balance of the checkable deposits grows by 2 million dollars.

03

Final answer

The checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank is grows by 2 million dollars.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL).

a. Calculate the value of the money multiplier using the most recent data available and the data from five years prior.

b. Based on your answer to part (a), how much would a 100million open market purchase of securities affect the M1 money supply today and five years ago?

If the Fed sells 1 million of bonds and banks reduce their borrowings from the Fed by million, predict what will happen to the money supply.

17. For the following operations, what happens to the central bank's and commercial bank's reserves and the monetary base? Use T-account to show changes in balances. Assume that the amount is $10million.

a. The central bank provides loan to commercial bank.

b. The central bank sells securities to the commercial bank.

c. The commercial bank repays the loan to the central bank.

During the Great Depression years from 1930 to 1933, both the currency ratio c and the excess reserves ratio e rose dramatically. What effect did these factors have on the money multiplier?

In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply?
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