Suppose that JP Morgan Chase sells a $100 million Treasury bill to the US Federal Reserve
a. Show the immediate impact of this transaction on the balance sheet of the Fed and on the balance sheet of JP Morgan Chase.
Note: Write out your answer in terms of the change in the balance sheet due to this transaction, as discussed in class.
b. Assume that before selling the T-bill, JP Morgan Chase had no excess reserves. Suppose that the required reserve ratio is 20%. Also assume that JP Morgan Chase makes the maximum loan it can from the funds acquired by selling the T-bills.
Show the effect of this transaction by listing the change in the balance sheet. Note that you are now looking at the change in the balance sheet after making the loan has been made.
c. Now suppose that whoever took out the loan in part b) writes a check for this amount and that the person receiving the check deposits it in Wells Fargo Bank.
Show the effect of these transactions on the balance sheets of JP Morgan Chase and Wells Fargo after the check has been cleared.