Reserves increase by the same amount if the proceeds

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Unformatted text preview: erson sells the $100 of bonds to the Fed. She deposits the Fed’s check to a local bank. Nonbank Public Assets Liabili<es Securi<es −$100 Checkable deposits +$100 Banking System Assets Reserves Liabili<es +$100 Checkable deposits +$100 Federal Reserve System •  Iden<cal results as the Assets purchase from a bank Securi<es +$100 •  ∆ Monetary base = +$100 Liabili<es Reserves +$100 7 Open Market Purchase from the Nonbank Public (2) •  A person sells the $100 of bonds to the Fed and cashes the Fed’s check at the Fed. Nonbank Public Assets Federal Reserve System Liabili<es Securi<es −$100 Currency Assets +$100 Securi<es Liabili<es +$100 Currency in circula<on +$100 •  No changes in reserves •  Currency ↑ by $100 •  ∆ Monetary base = +$100 8 Open Market Purchases: Summary The effect of an open market purchase •  On Reserves –  No effect if the bond seller cashes the check. –  Reserves increase by the same amount if the proceeds are kept in deposits. •  On the monetary base –  Always the monetary base increases by the same amount of the purchase. 9 Open Market Sale (1) •  The Fed sells $100 of bonds to the nonbank public that pays by cash. Nonbank Public Federal Reserve System Assets Liabili<es Securi<es +$100 Currency −$100 Assets Securi<es Liabili<es −$100 Currency in circula<on •  No changes in reserves, but currency ↓ by $100. •  ∆ Monetary base = −$100 −$100 10 Open Market Sale (2) •  The Fed sells $100 of bonds to the nonbank public that pays by wri<ng a check of $100. Nonbank Public Assets Liabili<es Securi<es +$100 Checkable deposits −$100 Banking System Assets Reserves Liabili<es −$100 Checkable deposits −$100 Federal Reserve System Assets •  No changes in currency, Securi<es −$100 but reserves ↓ by $100. •  ∆ Monetary base = −$100 Liabili<es Reserves −$100 11 Open Market Sale (3) •  The Fed sells $100 of bonds to the banks. Banking System Federal Reserve System Assets Liabili<es Assets Liabili<es Securi<es +$100 Reserves −$100 Securi<es −$100 Reserves −$100 •  No changes in currency, but reserves ↓ by $100. •  ∆ Monetary base = −$100 •  The effect of market opera<ons on the monetary base is much more certain than the effect on reserves. 12 Shigs from Deposits into Currency •  Even without open market opera<ons, reserves in the banking system can change. Nonbank Public Assets Liabili<es Checkable deposits −$100 Currency +$100 Banking System Assets Reserves −$100 Che...
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