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    Monetary policy and fractional reserves

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    Suppose the Fed purchases $5 billion worth of government bonds from Bill Gates, who banks at the Bank of America in San Francisco. Show the effects on the balance sheets of the Fed, the Bank of America, and Gates. (Hint: Where will the Fed get the $5 billion to pay Gates?) Does it make any difference if the Fed buys bonds from a bank or an individual?

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    Solution Preview

    The Fed writes out a check for $5 billion and gives it to Bill Gates in return for the bonds. Bill Gates deposits the check in his bank account, lending it to the Bank of America. Every time the Fed buys ...

    Solution Summary

    This solution discusses monetary policy and fractional reserves.

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