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Chapter 15: Q.3 (page 410)

Suppose the Fed buys $1million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?

Short Answer

Expert verified

The checkable deposit account will increment. This is because when the Fed purchases securities from the banks, the cash supply in the bank increments. This increment saves

Step by step solution

01

Concept Introduction

A checkable account alludes to a ledger that permits an individual to pull out their money whenever without advising the bank. A portion of the detailed instances of checkable deposit accounts is reserve funds, checking, and currency market accounts.

02

Explanation

A bond connects with financial debt security that the public authority for the most portion uses to raise capital for its operations and exercises. The checkable deposit account will increment. This is on the grounds that when the Fed purchases a bond from the banks, the cash supply in the bank increments. This increments reserves. As per the laws of the money multiplier, the expansion in overabundance bank saves increments checkable deposits. The recipe for getting the adjustment of a checkable deposit is given underneath:

changes in a checkable deposit account = changes in excess reserves X 1/r, where r is the reserve rate

03

Final Answer

The checkable deposit account will increment.

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Most popular questions from this chapter

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.

Suppose that the required reserve ratio is 9%, currency in circulation is 620billion, the amount of checkable deposits is 950billion, and excess reserves are 15billion.

a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier.

b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of 1300billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply.

c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier?

d. Following the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?

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?

"The Fed can perfectly control the amount of the monetary base, but has less control over the composition of the monetary base.” Is this statement true, false, or uncertain? Explain.

Classify each of these transactions as an asset, a liability, or neither for each of the “players” in the money supply process—the Federal Reserve, banks, and depositors.

a. You get a \(10,000loan from the bank to buy an automobile.

b. You deposit \)400into your checking account at the local bank.

c. The Fed provides an emergency loan to a bank for\(1,000,000.

d. A bank borrows \)500,000in overnight loans from another bank.

e. You use your debit card to purchase a meal at a restaurant for $100.
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