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Chapter 15: Q.5 (page 410)

If a bank sells \(10 million of bonds to the Fed to pay back \)10million on the loan it owes, what is the effect on the level of checkable deposits?

Short Answer

Expert verified

The checkable deposits remain unchanged.

Step by step solution

01

Concept Introduction

Checkable deposit is a specialized term for any demand deposit account against which checks or drafts of any sort might be composed.

02

Explanation

None. The decrease of $10million in discount loans and increment of $10million of bonds held by the Fed leaves the degree of reserves unaltered so checkable deposits to remain unaltered.

03

Final Answer

The reduction in discount loans and increase in bonds leaves the checkable deposit unchanged.

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Most popular questions from this chapter

Suppose the central bank of your country increases reserves by purchasing $1 million worth of bonds from banks and that the banking system in your economy is in equilibrium. What will happen to the level of checkable deposits? Use T-accounts to explain your answer.

The Fed buys $100 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?

If reserves in the banking system increase by 1billion because the Fed lends 11billion to financial institutions, and checkable deposits increase by 9billion, why isn’t the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for the banking system in equilibrium.

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.

Go to the St. Louis Federal Reserve FRED database, and find the most current data available on Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ).

  1. Calculate the value of the currency deposit ratio c.
  2. Use RESBALNS and RESBALREQ to calculate the amount of excess reserves, and then calculate the value of the excess reserve ratio e. Be sure the units of total and required reserves are the same when you do the calculations.
  3. Assuming a required reserve ratio rr of 11%, calculate the value of the money multiplier m.
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