Suppose that the Fed makes an open market purchase of $200,000 in bonds from QRS Bank.

a. Show how this affects the Fed balance sheet.

b. Show how this affects the balance sheet of QRS Bank.

c. Assume that QRS Bank lends out as much as it can, based on this changed situation. What does its balance sheet look like after it makes the loans?

d. Assume that all the proceeds from those loans are deposited in TUV Bank. What is the effect on TUV Bank’s balance sheet?

e. Assume that the required reserve ratio is 10 percent. What new opportunity does TUV Bank now face? What is it likely to do?