5. The required reserve ratio (m) is 10%. Key Bank currently has: Reserves of $115 million, loans of $235 million, and demand deposits of $350 million.
A. Illustrate a carefully labeled T-Account (balance sheet) for Key Bank.
B. What is Key Bank's level of excess reserves? (Be certain to show how you determined your answer).
C. The Federal Reserve Bank then sells $20 million of U.S. government securities (bonds) directly to Key Bank. Show the new T-Account (balance sheet) for Key Bank.
D. After this Federal Reserve Bank action, what is Key Bank's level of excess reserves? (Be certain to show how you determined your answer.)
E. What would be the effect of the Federal Reserve Bank sale in part C on interest rates charged on loans? Explain why.
F. Under which economic situation (recession or inflation) would the Federal Reserve Bank sell U.S. government securities (bonds) on the open market? Explain why.
G. Assume the federal government is considering changing the level of income taxes on households. Under the economic situation you indicated in part F, which one would be considered an appropriate fiscal (budget) policy: an increase in taxes or a decrease in taxes? Explain why.