Econ 3229 Ch 17

When Tom withdraws $300 from his checking account, there is no change in the total assets or total liabilities on the Fed's balance sheet. However, there is an increase in the liability of currency by $300, as the Fed is now responsible for providing Tom with the withdrawn cash. At the same time, there is a decrease in the liability of reserves by $300, as the funds that Tom withdrew were previously held as reserves in his checking account.

A central bank holds foreign exchange reserves primarily for foreign exchange intervention. This means that the central bank uses these reserves to stabilize the domestic currency's exchange rate by buying or selling foreign currencies in the foreign exchange market. By intervening in the foreign exchange market, the central bank can influence the value of its currency and maintain stability in the economy. The other options, such as diversification purposes and safekeeping, may also be secondary reasons for holding foreign exchange reserves, but the primary purpose is foreign exchange intervention.

The largest liability on the Federal Reserve's balance sheet is currency. This refers to the physical money in circulation, such as banknotes and coins. As the central bank, the Federal Reserve is responsible for issuing and managing the nation's currency. This liability represents the amount of currency that has been issued and is held by the public and banks.

Reserves refer to the assets held by commercial banks, such as cash or deposits, that are maintained with the central bank. These reserves act as a form of security for the commercial banks and can be used to meet their obligations, such as withdrawals by customers. At the same time, these reserves are liabilities for the central bank, as they represent the amount of money that the central bank owes to the commercial banks. Therefore, the correct answer is "Assets of the commercial banks and liabilities of the central bank."

When a central bank sells securities from its portfolio, it is essentially removing assets from its balance sheet. As a result, the size of the balance sheet decreases. This is because the balance sheet represents the central bank's assets and liabilities, and selling securities reduces the amount of assets held by the central bank. Therefore, the correct answer is that the sale of securities will decrease the size of the central bank's balance sheet.

Vault cash refers to the physical currency held by commercial banks in their vaults. It is considered a part of reserves because it can be used to meet the cash demands of customers. Additionally, vault cash is also an asset of commercial banks because it represents a valuable resource that can be used to support their operations and lending activities.

A central bank's main asset is securities. Securities refer to financial instruments such as government bonds, treasury bills, and corporate bonds that are held by the central bank. These securities are typically purchased by the central bank as a way to manage monetary policy, control interest rates, and regulate the money supply in the economy. By holding securities, the central bank can influence the overall liquidity and stability of the financial system.

Currency is not considered an asset on the central bank's balance sheet because it is the liability of the central bank. When the central bank issues currency, it is essentially creating a liability for itself as it owes the value of that currency to the holder. Therefore, currency does not appear as an asset on the central bank's balance sheet.

If the required reserve rate is ten percent and banks do not hold any excess reserves, it means that banks are required to hold ten percent of their deposits as reserves. When the Fed purchases $1 million in the open market, this money is injected into the banking system. Since banks are required to hold ten percent of their deposits as reserves, they can lend out the remaining ninety percent. Therefore, the initial $1 million purchase by the Fed will result in a deposit creation of $10 million ($1 million divided by 0.10).

Multiple deposit creation refers to the process by which banks create additional deposits in the banking system through the lending and borrowing activities. When a bank receives a deposit, it keeps a fraction of it as reserves and lends out the rest. This loan amount is then deposited in another bank, which in turn keeps a fraction as reserves and lends out the rest. This process continues, resulting in the creation of multiple deposits from a single initial deposit. Therefore, multiple deposit creation is the term used to describe the process of turning reserves into bank deposits.

The monetary base is the total amount of currency in circulation that is held by the public and the reserves held by the banking system. This includes physical currency in the hands of the public as well as the reserves held by banks in their accounts with the central bank.

The correct answer is that the Fed's balance sheet will show an increase in the asset category of securities and the liability category of reserves by $2 billion. This means that the Fed will have $2 billion worth of securities as assets and $2 billion worth of reserves as liabilities. This open market purchase of U.S. Treasury securities increases the Fed's balance sheet size and changes the composition of assets from cash to securities.

If Bank A sells a $100,000 U.S. Treasury bond to the Fed, Bank A's excess reserves will increase by $100,000. This is because when the Fed buys the bond, it pays Bank A $100,000, which increases Bank A's reserves. Since the reserves are in excess of what is required by regulations, they are considered excess reserves. Therefore, the correct answer is that Bank A's excess reserves will increase by $100,000.

Central banks conduct monetary policy operations by adjusting the reserves held by commercial banks. Reserves refer to the funds that commercial banks are required to hold with the central bank. By changing the level of reserves, central banks can influence the amount of money available in the economy. Increasing reserves encourages banks to lend more, stimulating economic activity, while decreasing reserves restricts lending and helps control inflation. Therefore, reserves play a crucial role in the implementation of monetary policy.

Bank A has checkable deposits of $100 million. The required reserve rate is ten percent. This means that Bank A is required to hold ten percent of its checkable deposits as reserves. Therefore, Bank A must hold $10 million as reserves.

Bank A has vault cash equaling $1 million and deposits at the Fed equaling $14 million. These are both considered reserves.

To calculate the maximum amount Bank A could lend, we subtract the required reserves from the total reserves.

Total reserves = vault cash + deposits at the Fed = $1 million + $14 million = $15 million
Required reserves = 10% of checkable deposits = 10% of $100 million = $10 million

Maximum amount Bank A could lend = Total reserves - Required reserves = $15 million - $10 million = $5 million

Therefore, the correct answer is $5 million.

If the Fed increases the required reserve rate from ten percent to twenty percent, it means that banks are required to hold a larger portion of their deposits as reserves. This reduces the amount of money that banks can lend out, leading to a decrease in the simple deposit expansion multiplier. The multiplier determines how much the money supply can expand through the lending process. Therefore, the multiplier would be half as large as it was before the increase in the required reserve rate.

When the Fed conducts an open market sale of U.S. Treasury securities, it means that the Fed is selling these securities to the public. As a result, the Banking System's balance sheet will show no net change in assets or liabilities. However, there will be a change in the composition of assets, with securities increasing as the Fed sells them, and reserves decreasing as the public pays for the securities. This means that the Banking System will have more securities and fewer reserves, but the overall value of assets and liabilities will remain the same.

When the Fed sells German bonds to commercial banks, its assets increase because it receives cash from the sale of the bonds. At the same time, its liabilities also increase because it owes the commercial banks the cash received from the sale. For the banking system, the value of assets and liabilities does not change because the commercial banks are simply exchanging their cash for the German bonds. However, the composition of assets changes as the commercial banks now hold German bonds instead of cash.

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