Suppose that the Federal Reserve purchases $10 million in securities [T-bills] from First National Bank by increasing FNB’s account at the Fed.
a. Use a T-account to show the impact of this transaction on FNB’s balance sheet. Remember that the funds a bank has on deposit at the Fed counts as part of its reserves.
b. Assume that before selling the securities, FNB has no excess reserves. What is the maximum amount of this $10 million that FNB can lend out? Assume that the required reserve ratio is 10 percent.
c. What is the maximum total increase in the money supply that can result from the Fed’s purchase of the securities? Again, assume that the reserve ratio is 10 percent.
d. Would you answers change if rather than a purchase of securities, a customer deposited a check for $10 million in FNB? Is so, what would be the difference in the effect on the money supply?