Exploring Monetary Policy 

7. Start with these balance sheets (amounts in billions of dollars):

. . . .. . . .

Federal Reserve
Bank A

Assets

Liab + NW
Assets
Liab + NW

US Gov Sec 50

Dep of Banks 18

Legal res .1

Dem Dep 1

Other 20

Fed Res Notes 40

Loans 1

Other .1

Other 12

a) If the legal reserve ratio is 10%, does Bank A have any excess reserves?

b) Suppose the Federal Reserve buys $.1 billion of U.S. securities. It pays by writing a check on itself. The seller of the securities deposits this check in his account at Bank A. The depositor will be paid by having his checking account by $billion.

c) Bank A forwards the check to the Federal Reserve for payment. The Federal Reserve will pay Bank A by by $.1 billion. On the bank's balance sheet, this payment will result in a(n) of $.1 billion.

d) As a result of the transactions in parts b and c, what will the balance sheets of the Federal Reserve and Bank A look like?

. . . .. . . .

Federal Reserve

Bank A

Assets
Liab + NW
Assets
Liab + NW

US Gov Sec

Dep of Banks

Legal res

Dem Dep

Other

Fed Res Notes

Loans

Other

Other

e) As the immediate result of this transaction, the money stock has by $ billion.

f) Bank A now has excess reserves of $billion

g) If Bank A wants to eliminate these excess reserves, it can buy securities or make a loan for $ billion.

h) The extra reserves created by the Federal Reserve's action can support an extra $billion in new checking-account money.



8. We have seen how changes in the Fed's balance sheet can affect the amount of reserves in the banking system. The Fed publishes the essentials of its balance sheet in tables showing sources and uses of reserve funs. You can find them on the web at <http://www.federalreserve.gov/releases/H41/Current/>.

a. What is the dominant asset the Fed has on its balance sheet?
b. Which items on its balance sheet earn interest for the Fed? On which does it have to pay interest? What do you conclude about the profitability of the Fed?
c. See if you can find how big bank deposits with the Federal Reserve were prior to September, 2008. Do you think banks were complaining a lot about how much money they were losing because of reserve requirements?
d. What is the dollar amount of Federal Reserve notes that the Fed has issued? The population of the United States is less than 300 million. Using 300 million as the population of the US, what is your share of that currency? Do you have your share?
e. If you answered d correctly, it should not surprise you that at least half of the paper money that the Federal Reserve has issued is held outside of the U.S. Is the fact that people in other nations want to hold U.S. dollars good or bad for the citizens of the United States? (Hint: We trade paper that has no value except as money for real goods and services.)

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