ch 8 - 3 The Federal Reserve wants to increase the supply...

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3. The Federal Reserve wants to increase the supply of reserves, so it purchases $1 million dollars worth of bonds from the public. Show the effect of this open market operation using T-accounts. Answer: Banking System Assets Liabilities Reserves + $1 million Checkable Deposits + $1 million Federal Reserve System Assets Liabilities Securities + $1 million Reserves + $1 million 4. Use T-Accounts to show the effect of the Federal Reserve being paid back a $500,000 discount loan from a bank. Answer: Banking System Assets Liabilities Reserves - $500,000 Discount Loans - $500,000 Federal Reserve System Assets Liabilities Discount Loans - $500,000 Reserves - $500,000 7. A bank currently holds $150,000 in excess reserves. If the current reserve requirement is 12.5%, how much could the money supply change? How could this happen? Answer: The money supply could increase if the bank lent its excess reserves. Since the reserve requirement is 12.5%, the potential money multiplier is 1/0.125, or 8. If the bank lends all of the excess reserves, the money supply could increase by $150,000 × 8 = $1,200,000.
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