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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Suppose the Fed conducts an open market purchase by buying Chapter 28, Problem 38P, Suppose the Fed conducts an open market purchase by buying million in Treasury bonds from Acme Bank. million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets - reserves 30, bonds 50, and loans 50; Liabilities - deposits 300 and equity 30.

To determine

The changes in the balance sheet of A Bank as a result of purchase of $10 million worth of bonds by Federal Reserve are to be determined.

Explanation

The balance sheet of the A Bank is represented below:

    Assets (million $)Liabilities (million $)
    Reserves 30Deposits 300
    Bonds 50Equity 30
    Loans 50

Now if Fed purchases $10 million worth of Treasury bonds from A Bank, A Bank’s assets would reduce by $10 million since it would mean release of bonds worth $10 million...

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