Answered: Assume that the following balance sheet…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 4PA

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Working through an open-market operation

Assume that the following balance sheet portrays the state of the banking system. The banks currently have no excess reserves.

Assets	Liabilities and Net Worth
(Billions of Dollars)
Total reserves	10	Checkable deposits	25
Loans	5
Securities	10
Total	25	Total	25

What is the required reserve ratio?

40%

25%

10%

Suppose that the Federal Reserve (the "Fed") sells $3 million of bonds to a bond dealer, who pays the Fed by writing a check against the funds in her checking account. What is the initial impact of this transaction?

The banking system's holdings of securities fall by $3 million, and the banking system's total reserves rise by $3 million.

Checkable deposits fall by $3 million, and the banking system's total reserves fall by $3 million.

Checkable deposits fall by $3 million, and the banking system's holdings of securities fall by $3 million.

The banking system's holdings of securities rise by $3 million, and the banking system's total reserves fall by $3 million.

As a result of the Fed's sale of $3 million of securities, checkable deposits in the banking system can potentially by as much as .

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