College of Business Administration
Assignment #2
FINA 3313
Money and Banking
Name: Majed Al-Malehi
ID: 200600075
Question 6
Suppose that the fed sells $2 million of bonds to the first National bank and the
bank will pay 2 $million to fed. The bank reserve will decrease by $ 2 million,
The T- account which list only the change that occur in balance sheet will be as
follows the securities increase by2million and the reserves will decrease by 2
million.
The first National bank
Assets
Securities
Reserves
Liabilities
+$ 2000000
-- $ 2000000
The Fed bank alters the balance sheet by decreasing its liabilities by $ 2 million
of checkable deposit and decreasing its assets with the $ 2 $ million loans. The Taccount will be as follows
The Federal Reserve System
Assets
Securities
Liabilities
- 2000000
Reserves
- $ 2000000
The banking system with no required reserve ratio the T- account in the banking
system will be
The banking system
Assets
Securities
Reserves
Loans
Liabilities
+$ 2000000
- $ 2000000
- $ 2000000
checkable deposit
- $ 2000000
Question 8
Open market purchase from a bank
When the fed buys $1million of bond from the first National bank.with a 10%
excess reserve the bank will have an increase in reserve of $ 1 million, assume
that the loans will not be change because the bank does not want to hold excess
reserve to earn little interest. The T- account will be as follows
The first National bank
Assets
Securities
Reserves
Liabilities
-- $ 1000000
+$ 1000000
When the bank have 10% excess reserve . The bank will alter its balance sheet by
increasing its liabilities by $ 1million of checkable deposit and increasing its
assets with the $ 1 million. The first national banks will make loans by 900000
and the excess reserve will be 100000 The T- account will be as follows
The first National bank
Assets
Securities
Reserves
Loans
Liabilities
-- $ 1000000
+$ 100000
+ $ 900000
checkable deposit
+ $ 1000000
The banking system with 10% excess reserve let assume that the $1 million of
deposit created by the first national banks will make loans by 10000000 in the all
banks and the excess reserve will be 1000000, the T- account in the banking
system will be as follows:
The banking system
Assets
Liabilities
Securities
--$ 1000000
Excess reserve + $ 1000000
Loans
+ $ 10000000
checkable deposit
+$ 10000000
Question 19
If the fed sells $1000000 of bonds and banks reduce their borrowing from the
Fed by$1000000
The sale of bond will decrease the money supply because of a negative
relationship between the selling bonds and the money supply. and this depends on
the simple deposit multiplier and the banking systems reserve
Change Deposit = 1/r * Change R
r = required reserve ratio
R = reserves for the banking system
If the banks reduce their borrowing from the fed by $ 1million, the amount of
reserves would fall and the money supply would decrease So the money supply is
positively related to the level of borrowed reserves.