Thisexercise is on the multiple contraction of the money supply resulting

Thisexercise is on the multiple contraction of the money supply resulting from openmarket sales of securities by the Federal Reserve. Assume: (a) the reserve requirementof commercial banks is 10%, and(b) all commercialbanks hold no excessreserves. I. Suppose the Federal Reserve sells two $14,000 bonds, one each to Ireneand Paul. Irene pays for her bond withmoney she withdraws from her account at Nations Bank. Paul pays for his bond with money he stored inhis closet. a. The following is Nations Bank’s balance sheet before Irene withdraws $14,000 in cash. Complete the balance sheet. Nations Bank: Balance SheetAssetLiabilitiesReservesDemand Deposits: Loansof Irene19,000Securities25,000of othersTotal220,000Totalb. Show the impact of Irene’s withdrawal of cash on Nations Bank’sbalance sheet. Nations Bank: Balance SheetAssetLiabilitiesReservesDemand Deposits: Loansof IreneSecuritiesof othersTotalTotalc. By how much do Nations Bank’s reserves fall short of the legalrequirement?OVEREconomics 102 Professor McClellandII. Suppose Nations Bankreplenishes its reserves by selling some of its securities to Sarah (i. e. thebank sells Sarah securities equal to the amount its reserves fall short). Sarah has a checking account at the Bank ofAmerica. a. Complete the Bank of America’s balance sheet before Sarah purchases the securities. The Bank of America: Balance SheetAssetLiabilitiesReservesDemand Deposits: Loans120,000of Sarah34,000Securitiesof others526,000TotalTotalb. Show what happens on Nations Bank’s and the Bank of America’sbalance sheets when Sarah pays for those securities by giving Nations Bank apersonal check on her deposit at the Bank of America, which Nations Bank turnsover to the Bank of America in exchange for cash. Nations Bank: Balance SheetAssetLiabilitiesReservesDemand Deposits: Loansof IreneSecuritiesof othersTotalTotal The Bank of America: Balance SheetAssetLiabilitiesReservesDemand Deposits: Loansof SarahSecuritiesof othersTotalTotalIII. What is the decrease inmoney supply so far, due only to the original sale of two bonds to Irene and toPaul as well as the subsequent sale of Nations Bank’s securities to Sarah?IV. a. If the Bank of Americareplenishes its shortage of reserves (caused by transactions described in II)by selling some of its securities, how much must it sell? b. What will be the ultimate decrease in the money supplyresulting from this initial sale of two bonds by the Federal Reserve?c. How is your answer to IV (b) changed if Nations Bank begins with$14,000 of excess reserves?

Thisexercise is on the multiple contraction of the money supply resulting

Thisexercise is on the multiple contraction of the money supply resulting from openmarket sales of securities by the Federal Reserve. Assume:

(a) the reserve requirementof commercial banks is 10%, and

(b) all commercialbanks hold no excessreserves.

I. Suppose the Federal Reserve sells two $14,000 bonds, one each to Ireneand Paul. Irene pays for her bond withmoney she withdraws from her account at Nations Bank. Paul pays for his bond with money he stored inhis closet.

a. The following is Nations Bank’s balance sheet before Irene withdraws $14,000 in cash. Complete the balance sheet.

Nations Bank:Balance Sheet

Asset

Liabilities

Reserves

Demand Deposits:

Loans

of Irene

19,000

Securities

25,000

of others

Total

220,000

Total

b. Show the impact of Irene’s withdrawal of cash on Nations Bank’sbalance sheet.

Nations Bank:Balance Sheet

Asset

Liabilities

Reserves

Demand Deposits:

Loans

of Irene

Securities

of others

Total

Total

c. By how much do Nations Bank’s reserves fall short of the legalrequirement?

OVER

Economics 102 Professor McClelland

II. Suppose Nations Bankreplenishes its reserves by selling some of its securities to Sarah (i.e. thebank sells Sarah securities equal to the amount its reserves fall short). Sarah has a checking account at the Bank ofAmerica.

a. Complete the Bank of America’s balance sheet before Sarah purchases the securities.

The Bank of America:Balance Sheet

Asset

Liabilities

Reserves

Demand Deposits:

Loans

120,000

of Sarah

34,000

Securities

of others

526,000

Total

Total

b. Show what happens on Nations Bank’s and the Bank of America’sbalance sheets when Sarah pays for those securities by giving Nations Bank apersonal check on her deposit at the Bank of America, which Nations Bank turnsover to the Bank of America in exchange for cash.

Nations Bank:Balance Sheet

Asset

Liabilities

Reserves

Demand Deposits:

Loans

of Irene

Securities

of others

Total

Total

The Bank of America:Balance Sheet

Asset

Liabilities

Reserves

Demand Deposits:

Loans

of Sarah

Securities

of others

Total

Total

III. What is the decrease inmoney supply so far, due only to the original sale of two bonds to Irene and toPaul as well as the subsequent sale of Nations Bank’s securities to Sarah?

IV. a. If the Bank of Americareplenishes its shortage of reserves (caused by transactions described in II)by selling some of its securities, how much must it sell?

b. What will be the ultimate decrease in the money supplyresulting from this initial sale of two bonds by the Federal Reserve?

c. How is your answer to IV (b) changed if Nations Bank begins with$14,000 of excess reserves?