ECN 111 Washington College Money Banking Financial Markets & Institutions Worksheet
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Assume that all banks in the banking system are initially fully loaned up, and that the Required Reserve Ratio is 20%.a) If the Fed sells $1000 of bonds on the open market, how will your answers to both 1d) and 1e) change?Explain.Continue to assume that the Required Reserve Ratio = 20%. If the Federal Reserve buys $500 on the open market, and the money they paid is deposited in Bank A.Explain and illustrate the impact of the Feds purchase on Bank As balance sheet below: Calculate Bank As excess reserves.Explain and/or show your work.How many new loans can Bank A make?Assuming that Bank A makes these loans and the money is deposited in Bank B, show the impact of the loan, and subsequent deposit, on the balance sheets of Bank A and Bank B, below:By how much will the reserves of the banking system change as a result of the Feds purchase above?Using the money multiplier, calculate the total change in deposits (and loans) for the banking system as a whole.Explain and show your work.Illustrate your answer in the t-account for the banking system as a whole below: BANK A BALANCE SHEET ASSETS LIABILITIES BANK A BALANCE SHEET ASSETSLIABILITIES BANK B BALANCE SHEET ASSETS LIABILITIES ECN 111 Module 6: Worksheet Assignment for Video 6.2 PAGE 2 BANKING SYSTEM BALANCE SHEET ASSETS LIABILITIES b)Illustrate your answers to 2a) in the t-account for the banking system as a whole below.You do not need to show t-accounts for Banks A & B. BANKING SYSTEM BALANCE SHEET ASSETS LIABILITIES
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ECN 111 Module 6: Handout for Video 6.2
IMPACT OF FEDERAL RESERVE POLICY ON BANK BALANCE SHEETS
In Video 6.1 we talked about the different tools that the Federal Reserve uses to change the
money supply. Of the three, Open Market Operations are the most commonly used policy. In
fact, the Fed buys and sells bonds daily through the open market trading desk at the New York
Fed. This is one of the reasons that the president of the New York Fed is always on the FOMC.
In Video 6.1, we talked about how the Fed buying and selling bonds affects bank reserves,
loans and the money supply. We will use the t-accounts that, we derived in Module 5, to
illustrate the impact of the Fed buying and selling bonds on the money supply.
Using the same procedure that we used in Module 5, well be working with the t-accounts of
Bank A, Bank B, and the entire banking system. We will assume that: (i) all banks are currently
fully loaned up, i.e. have zero excess reserves; and (ii) the Required Reserve Ratio is 10%.
Note that there are no initial numbers in the t-accounts
all entries simply show changes.
What happens to the t-accounts If the Fed buys $1000 in bonds on the open market? For
simplicity, lets assume that the money the Fed pays for the bonds is deposited in Bank A,
initially increasing Bank As deposits and reserves by $1000. This can be seen in the t-account
below.
BANK A BALANCE SHEET
ASSETS
Reserves
LIABILITIES
+1000 Deposits +1000
Total Reserves +1000
Required Reserves +100 (.1×1000)
Excess Reserves +900
(1000-100)
Bonds
Loans
Since the Required Reserve Ratio is 10%, Bank A must keep 10% of the $1000 as Reserves.
Therefore, they can lend out their excess reserves of $900. This $900 leaves Bank A and is
ultimately deposited in another bank, call it Bank B.
BANK A BALANCE SHEET
ASSETS
Reserves
Bonds
Loans
+1000
-900
+900
LIABILITIES
Deposits +1000
Notice that after making the loan, Bank A no
longer has any excess reserves.
ECN 111 Module 6: Handout for Video 6.2
Page 2
With the new deposit of $900 (from the loan), both Bank Bs deposits and reserves will
increase by $900. Bank Bs t-account changes are shown below.
BANK B BALANCE SHEET
ASSETS
Reserves
+900
Bonds
Loans
LIABILITIES
Deposits +900
Total Reserves +900
Required Reserves + 90
Excess Reserves = + 810
Bank B can now lend out its excess reserves of $810
and the process continues until the
initial $1000 in new reserves is spread throughout the banking system.
Using the money multiplier derived in Module 5, we can see that, for the banking system as a
whole, deposits, and therefore the money supply) will increase by (1/.1) x $1000 = $10,000.
The impact on the balance sheet of the banking system as a whole is shown below.
BANKING SYSTEM BALANCE SHEET
ASSETS
LIABILITIES
Reserves
+1000 Deposits +10,000
Bonds
Loans
+9000
ECN 111 Module 6: Handout for Video 6.2
Page 3
What happens to the t-accounts If the Fed sells $1000 in bonds on the open market? For
simplicity, lets assume that the money the Fed is paid for the bonds it sells comes from
deposits in Bank A, initially decreasing Bank As deposits and reserves by $1000. This can be
seen in the t-account below.
BANK A BALANCE SHEET
ASSETS
Reserves
LIABILITIES
-1000 Deposits -1000
Total Reserves -1000
Required Reserves -100
Excess Reserves -900
Bonds
Loans
Since the Required Reserve Ratio is 10%, Bank As required reserves go down by $100, but
their total reserves fell by $1000. Therefore, they have a shortage of reserves and must
decrease their loans by $900 to replenish their reserves. As a result, Bank As loans go down
by $900 and their reserves go back up by $900, as old loans are paid off. Assuming that the
money to pay off the loans comes from Bank B, this adds $900 reserves to Bank As balance
sheet but reduces the reserves on Bank Bs balance sheet by $900.
BANK A BALANCE SHEET
ASSETS
Reserves
Bonds
Loans
-1000
-900
-900
LIABILITIES
Deposits -1000
Notice that after making the loan, Bank A is
back to being fully loaned up.
ECN 111 Module 6: Handout for Video 6.2
Page 4
With the withdrawal of $900, both Bank Bs deposits and reserves will decrease by $900. Bank
Bs t-account changes are shown below.
BANK B BALANCE SHEET
ASSETS
Reserves
-900
Bonds
Loans
LIABILITIES
Deposits -900
Total Reserves -900
Required Reserves – 90
Excess Reserves = – 810
Bank B now has negative excess reserves of $810 so they must decrease loans by $810 to
replenish their reserves
and the process continues until the initial $1000 in decreased
reserves is spread throughout the banking system.
Using the money multiplier derived in Module 5, we can see that, for the banking system as a
whole, deposits, and therefore the money supply) will decrease by (1/.1) x $1000 = $10,000.
The impact on the balance sheet of the banking system as a whole is shown below.
BANKING SYSTEM BALANCE SHEET
ASSETS
LIABILITIES
Reserves
-1000 Deposits -10,000
Bonds
Loans
-9000
ECN 111 Module 6: Worksheet Assignment for Video 6.2
(Due Sat 5/9)
1) Assume that all banks in the banking system are initially fully loaned up, and that
the Required Reserve Ratio is 20%.
a) If the Federal Reserve buys $500 on the open market, and the money they paid is
deposited in Bank A. Explain and illustrate the impact of the Feds purchase on Bank
As balance sheet below:
BANK A BALANCE SHEET
ASSETS
LIABILITIES
b) Calculate Bank As excess reserves. Explain and/or show your work.
c) How many new loans can Bank A make? Assuming that Bank A makes these loans
and the money is deposited in Bank B, show the impact of the loan, and subsequent
deposit, on the balance sheets of Bank A and Bank B, below:
BANK A BALANCE SHEET
ASSETS
LIABILITIES
BANK B BALANCE SHEET
ASSETS
LIABILITIES
ECN 111 Module 6: Worksheet Assignment for Video 6.2
PAGE 2
d) By how much will the reserves of the banking system change as a result of the Feds
purchase above? Using the money multiplier, calculate the total change in deposits
(and loans) for the banking system as a whole. Explain and show your work.
e) Illustrate your answer in the t-account for the banking system as a whole below:
BANKING SYSTEM BALANCE SHEET
ASSETS
LIABILITIES
2) a) If the Fed sells $1000 of bonds on the open market, how will your answers to both
1d) and 1e) change? Explain. Continue to assume that the Required Reserve Ratio =
20%.
b) Illustrate your answers to 2a) in the t-account for the banking system as a whole
below. You do not need to show t-accounts for Banks A & B.
BANKING SYSTEM BALANCE SHEET
ASSETS
LIABILITIES
Purchase answer to see full
attachment
Tags:
Assets Liabilities
BANKING SYSTEM BALANCE SHEET
Federal Reserve b
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