Discussion:
Suppose that the T-account for First California Bank is as follows.
|
Assets
|
Liabilities
|
|
Reserves
|
$50,000
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Deposits
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$500,000
|
|
Securities
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50,000
|
|
|
|
Loans
|
400,000
|
|
|
The Bank currently holds the reserves as required by the Fed, and all other banks in the nation do just the same, i.e., hold the exact amount of reserves as required by the Fed.
(1)Suppose that the Fed buys $30,000 securities from First California Bank, as part of the Fed's policy action to continue "quantitative easing." Draw the new T-account for First California Bank right after the purchase by the Fed.
(2)Suppose that all banks, including First California Bank, continue to holds the exact amount of required reserves. As a result of the Fed's purchase of $30,000 securities from First California Bank, how much of money supply will change? Is the change in money supply an increase or a decrease?