Question

Fill in the table below to show what happens when the Federal Reserve buys $100,000 in securities when the reserve rate is 10%. Assume that all excess reserves are loaned out. Federal Reserve Bank Assets | Liabilities Bank ONE Assets Liabilities Bank TWO Assets Liabilities

Explain your entries for the question above.

Answer 1

Federal Reserve Bank: Assets Securities 100,000 Liabilities Reserves 10,000 Bank ONE Liabilities Deposits 100,000 Assets Securities -100,000 Reserves • Required 10,000 Loans 90,000 Bank TWO Assets Reserves • Required 9,000 Loans 81,000 Liabilities Deposits 90,000 The above balance sheets sum up the given situation. Initially, Fed buys securities for money. This is reflected in his assets. The Fed liabilities will be required reserves of banks Bank one gets money worth $100,000 for securities sold Out of these, required reserves will be 10% of $100,000 = $10,000 Rest of the excess reserves of $90,000 are loaned out to Bank TWO which gets $90,000 in deposits Of these, the required reserves will be 10% of $90,000 that is $9000 Rest of the $81,000 of excess reserves will again be loaned out