Balance sheet of the banking industry assets

Balance Sheet of the Banking Industry
Assets Liabilities & Net worth
Loans $1000B deposits: $1000B
Reserves $100B Net worth $100B
It was estimated that nearly half of all banks had a neg. net worth
during the Great Recession
Say the Fed sets the required reserve ratio (RR) is 10%. Is it met?
Q: The Fed buys $10 B of bonds from the public in an “open market
operation.” How many things change above?

:
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Q: When the Fed buys bonds (i.e. an “open market purchase”), all
else equal, bond prices ____ and interest rates _____.
Q: The faed can easily change the amount of money in the
economy. How??
Q: Why are banks so important and why were so many bailed out in
2008?
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Part D: What is the Fed?
The Fed (Federal Reserve) is one of many central banks
Functions
•
conduct monetary policy
◦
interest rates (control inflation and max employment)
•
regulate banks and financial system
•
operate as a bank for banks
◦
banks have deposits/reserves there
◦
banks can barrow from the Fed and the “discount rate” (vastly less
important than the federal funds rate
•
Serve as the " lender of last resort” to prevent financial collapse
during a crisis
◦
lend at the discount rate
◦