Recently the Fed has been engaging in a contraction policy by selling Treasury securities to the non-bank public (suppose hypothetically this entails a sale of securities of $800 billion).
a. Show the respective changes for balance sheet accounts for this openmarket operation for the non-bank public, the banking system, and the Federal Reserve System.
b. Explain in your own words based on the loanable funds theory, the effect of the Fed’s actions on the supply of loanable funds, and the net effect on the economy’s equilibrium real interest rate.