Assume that this balance sheet portrays the state of the banking system. The banks have no excess reserves.
Total reserves Transactions accounts
$40 billion $160 billion
$160 billion $160 billion
1. The Federal Reserve buys $10 billion of bonds from a bond dealer. What is the initial impact of the transaction?
A. The banking system's holdings of securities rise by $10 billion and the banking system's total reserves fall by $10 billion.
B. Transactions accounts rise by $10 billion and the banking system's total reserves rise by $10 bill
C. The banking system's holdings of securities fall by $10 billion and the banking system's total reserves rise by $10 billion.
D. Transactions accounts rise by $10 billion and the banking system's holdings of securities rise by $10 billion.
1. The answer is C. The Fed puts $10 billion of reserves into the banking system in exchange for $10 billion ...
This solution explains how the banking system's assets and liabilities are affected by an open market bond purchase by the Federal Reserve, and how the transaction will affect the money supply.
Bank excess funds: evaluate profit and risk of three options for investment
A new client just deposited $300,000 in a corporate checking account. Idle money means missing out on profits, so we want to put the additional funds to good use as soon as possible. We've identified three potential options for using the additional funds?you should evaluate the profitability and risk implications of each of the options.
? Purchase additional government bonds. The selected securities are expected to yield about 4 percent per year.
? Purchase long-term AAA corporate bonds. The selected securities are expected to yield 7 percent per year.
? A loan to a local businessman to expand his business. The loan would have an interest rate of 10 percent.
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