(1) In Topic 2 lecture note "Money creation and control 8", suppose that the transaction changes to the following: the Fed. decides to reduce money supply by selling $0.5 M TBills to each of Bank X and Bank Y. Bank uses currency to purchase TBills while Bank Y uses its reserve at the Fed to purchase TBills. Fill out the balance sheets after transactions and calculate MO and M1. (11%) Central Bank Assets Liabilities Bank One Assets Liabilities Bank Two Assets Liabilities Consumer A Assets Liabilities Consumer B Assets Liabilities Capital Capital Capital Capital Capital (2) After Money Creation and Control 9 in the slide, if the Fed. purchases $0.25M Tbills from each of two banks in order to increase money supply. The Fed credit Bank X and Bank Y's reserve accounts to execute this transaction. Fill out the balance sheets and calculate MO and M1.(11%) Bank Two Central Bank Assets Liabilities Bank One Assets Liabilities Consumer A Assets Liabilities Consumer B Assets Liabilities Assets Liabilities Capital Capital Capital Capital Capital Money creation and control: 8 The Fed. decides to reduce money supply by selling $ 0.5 million TBills to each of Bank X and Bank Y, who use their reserves at the Central Bank to purchase the TBills. Bank Y Liabilitie Assets Consumer A Liabilitie Assets Consumer B Liabilitie Assets Building IM The Fed Bank X Liabilitie Liabilitie Assets Assets Bank Building X's IM Deposit IM FRnotes A's -0.5M IM Deposit 3M Building Bank Reserve IM Y's IM Loan Deposit -0.5M TBills from IM 4M -0.5M Bank Y A's Loan 0.5M -0.5M 1.5M -0.5M FR notes 2M Tbills 0.5M Capital Capital IM IM Reserve IM -0.5M Deposit at Bank 3M B's Deposit 1.SM Loan from Bank X 1.5M 0 FRnotes IM Deposit at Bank Y 1.5M Loan to Bank X 0.5M House 1.5M Tbills 0.5M Capital Capital Capital 1.568 IM 4M Money creation and control: 8 The Fed. decides to reduce money supply by selling $ 0.5 million TBills to each of Bank X and Bank Y, who use their reserves at the Central Bank to purchase the TBills. Bank X Liabilitie Assets Bank Y Liabilitie Assets Consumer A Liabilitie Assets S Consumer B Liabilitie Assets S Central Bank Liabilitie Assets S Bank X's Deposit 0.5M Building IM Building IM FRnotes IM A's Deposit 3M Deposit at Bank X 3M Reserve 0.5M Building IM Bank Y's Deposit 0.5M B's Deposit 1.5M Loan from Bank X 1.5M 0 Reserve 0.5M Loan from Bank Y 0.5M Deposit at Bank Y 1.5M Loan to Bank X 0.5M FRnotes IM TBills 3M Currency 2M A's Loan 1.5M House 1.5M Tbill 0.5M Capital IM Tbill 0.5M Capital IM Capital IM Capital 4M Capital 1.5M 69 Money creation and control: 8 Central Bank Banky MO FRnotes in the Fed+ bank deposits in the Fed = $0.5M+$0.5M+$2M =$3 M Camer A Llabile Consumer B Title Assets Liabilite 5 Assets 1 X Deposit OSM Building IM A's FRates Deposit IM M Building IM Deposit Reserve 0 SM X IM MI = deposit and FRnotes held by consumers = $3M + $1.5M +$1M =$5.5M Deposit BS Deposit 15M Building IM Rank YS Deposit OSM Reserve OM Lemn from Bak Y OSM Rates IM 15M Y 15M TBN 3M Back X OSM Canon As La ISM M House 15M Thil OSM Capital IM THI OSM Capital IM Capital IM Capital M Capital ISM After the transaction, the assets and liabilities of the Fed. went down; MO reduced, but Ml remained unchanged yet. Commercial banks' reserves went down. The lower supply of reserves will increase internal bank borrowing rate (Federal Funds rate), and this is so called open market operation 70 Money creation and control: 9 Seeing its reserve at the Fed. reduced, Bank X decides to reduce the loan in order to preserve the liquidity. Bank X asks for $ 0.5 M loan back from Consumer A. The Fed. Liabilitie Assets Bank X Liabilitie Assets Bank Y Assets Liabilitie Consumer A Liabilitie Assets Consumer B Liabilitie Assets Building IM Bank X's Deposit 0.5M Building IM FRnotes IM A's Deposit 3M -0.5M Deposit at Bank 3M -0.5M Reserve 0.5M Building IM Bank Y's Deposit 0.5M 0 B's Deposit 1.5M Reserve 0.5M Loan from Bank 1.5M -0.5M Deposit at Bank Y 1.5M Loan from Bank Y 0.5M TBills 3M Loan to Bank X 0.5M FRnotes IM Currency 2M A's Loan 1.5M -0.5M Tbill 0.5M House 1.5M Capital Tbill 0.5M Capital IM Capital IM Capital 4M IM Capital 1.5M 71 Money creation and control: 9 Seeing its reserve at the Fed. reduced, Bank X decides to reduce the loan in order to preserve the liquidity. Bank X asks for $ 0.5 M loan back from Consumer A. Bank X Liabilitie Assets S Bank Y Liabilitie Assets S Consumer A Liabilitie Assets S Consumer B Liabilitie Assets S Central Bank Liabilitie Assets S Bank X's Deposit 0.5M Building IM Building IM FRnotes IM A's Deposit 2.5M Reserve 0.5M Deposit at Bank X 2.5M Building IM Bank Y's Deposit 0.5M B's Deposit 1.5M Loan from Bank X IM 0 Reserve 0.5M Loan from Bank Y 0.5M Deposit at Bank Y 1.5M FRnotes IM Loan to Bank X 0.5M TBills 3M Currency 2M A's Loan IM House 1.5M Tbili 0.5M Capital IM Tbill 0.5M Capital IM Capital IM Capital 4M Capital 1.5M 72 Money creation and control: 9 MO = FRnotes in the Fed+ reserve in the Fed =$0.5M+$0.5M+$2M = $3 M Bak X Couna CB Central Bank LENS Ants $ BankY Lab 5 Arti 5 . X Deposit 0.5M Building IM AS Fastes Deposit IM 2SM Deposit Reserve OM Building IM BS Deposit LV 25 Y De Deposit Reme Lom from OM 6.5M MI = deposit and FRnotes held by consumers = $2.5M + $IM + $1.5M =$5M Fastes IM IM BY TBils M OM Curry M 2M IM Here IM Thil OSM Capital IM Thil OSM Capital IM Capital Capital M Capital LSM M1 decreases after Bank X cuts its loans in response to the Fed's open market operation that lows MO. This means that money available to consumers to spend reduces, which will in turn affects the economy. 73 (1) In Topic 2 lecture note "Money creation and control 8", suppose that the transaction changes to the following: the Fed. decides to reduce money supply by selling $0.5 M TBills to each of Bank X and Bank Y. Bank uses currency to purchase TBills while Bank Y uses its reserve at the Fed to purchase TBills. Fill out the balance sheets after transactions and calculate MO and M1. (11%) Central Bank Assets Liabilities Bank One Assets Liabilities Bank Two Assets Liabilities Consumer A Assets Liabilities Consumer B Assets Liabilities Capital Capital Capital Capital Capital (2) After Money Creation and Control 9 in the slide, if the Fed. purchases $0.25M Tbills from each of two banks in order to increase money supply. The Fed credit Bank X and Bank Y's reserve accounts to execute this transaction. Fill out the balance sheets and calculate MO and M1.(11%) Bank Two Central Bank Assets Liabilities Bank One Assets Liabilities Consumer A Assets Liabilities Consumer B Assets Liabilities Assets Liabilities Capital Capital Capital Capital Capital Money creation and control: 8 The Fed. decides to reduce money supply by selling $ 0.5 million TBills to each of Bank X and Bank Y, who use their reserves at the Central Bank to purchase the TBills. Bank Y Liabilitie Assets Consumer A Liabilitie Assets Consumer B Liabilitie Assets Building IM The Fed Bank X Liabilitie Liabilitie Assets Assets Bank Building X's IM Deposit IM FRnotes A's -0.5M IM Deposit 3M Building Bank Reserve IM Y's IM Loan Deposit -0.5M TBills from IM 4M -0.5M Bank Y A's Loan 0.5M -0.5M 1.5M -0.5M FR notes 2M Tbills 0.5M Capital Capital IM IM Reserve IM -0.5M Deposit at Bank 3M B's Deposit 1.SM Loan from Bank X 1.5M 0 FRnotes IM Deposit at Bank Y 1.5M Loan to Bank X 0.5M House 1.5M Tbills 0.5M Capital Capital Capital 1.568 IM 4M Money creation and control: 8 The Fed. decides to reduce money supply by selling $ 0.5 million TBills to each of Bank X and Bank Y, who use their reserves at the Central Bank to purchase the TBills. Bank X Liabilitie Assets Bank Y Liabilitie Assets Consumer A Liabilitie Assets S Consumer B Liabilitie Assets S Central Bank Liabilitie Assets S Bank X's Deposit 0.5M Building IM Building IM FRnotes IM A's Deposit 3M Deposit at Bank X 3M Reserve 0.5M Building IM Bank Y's Deposit 0.5M B's Deposit 1.5M Loan from Bank X 1.5M 0 Reserve 0.5M Loan from Bank Y 0.5M Deposit at Bank Y 1.5M Loan to Bank X 0.5M FRnotes IM TBills 3M Currency 2M A's Loan 1.5M House 1.5M Tbill 0.5M Capital IM Tbill 0.5M Capital IM Capital IM Capital 4M Capital 1.5M 69 Money creation and control: 8 Central Bank Banky MO FRnotes in the Fed+ bank deposits in the Fed = $0.5M+$0.5M+$2M =$3 M Camer A Llabile Consumer B Title Assets Liabilite 5 Assets 1 X Deposit OSM Building IM A's FRates Deposit IM M Building IM Deposit Reserve 0 SM X IM MI = deposit and FRnotes held by consumers = $3M + $1.5M +$1M =$5.5M Deposit BS Deposit 15M Building IM Rank YS Deposit OSM Reserve OM Lemn from Bak Y OSM Rates IM 15M Y 15M TBN 3M Back X OSM Canon As La ISM M House 15M Thil OSM Capital IM THI OSM Capital IM Capital IM Capital M Capital ISM After the transaction, the assets and liabilities of the Fed. went down; MO reduced, but Ml remained unchanged yet. Commercial banks' reserves went down. The lower supply of reserves will increase internal bank borrowing rate (Federal Funds rate), and this is so called open market operation 70 Money creation and control: 9 Seeing its reserve at the Fed. reduced, Bank X decides to reduce the loan in order to preserve the liquidity. Bank X asks for $ 0.5 M loan back from Consumer A. The Fed. Liabilitie Assets Bank X Liabilitie Assets Bank Y Assets Liabilitie Consumer A Liabilitie Assets Consumer B Liabilitie Assets Building IM Bank X's Deposit 0.5M Building IM FRnotes IM A's Deposit 3M -0.5M Deposit at Bank 3M -0.5M Reserve 0.5M Building IM Bank Y's Deposit 0.5M 0 B's Deposit 1.5M Reserve 0.5M Loan from Bank 1.5M -0.5M Deposit at Bank Y 1.5M Loan from Bank Y 0.5M TBills 3M Loan to Bank X 0.5M FRnotes IM Currency 2M A's Loan 1.5M -0.5M Tbill 0.5M House 1.5M Capital Tbill 0.5M Capital IM Capital IM Capital 4M IM Capital 1.5M 71 Money creation and control: 9 Seeing its reserve at the Fed. reduced, Bank X decides to reduce the loan in order to preserve the liquidity. Bank X asks for $ 0.5 M loan back from Consumer A. Bank X Liabilitie Assets S Bank Y Liabilitie Assets S Consumer A Liabilitie Assets S Consumer B Liabilitie Assets S Central Bank Liabilitie Assets S Bank X's Deposit 0.5M Building IM Building IM FRnotes IM A's Deposit 2.5M Reserve 0.5M Deposit at Bank X 2.5M Building IM Bank Y's Deposit 0.5M B's Deposit 1.5M Loan from Bank X IM 0 Reserve 0.5M Loan from Bank Y 0.5M Deposit at Bank Y 1.5M FRnotes IM Loan to Bank X 0.5M TBills 3M Currency 2M A's Loan IM House 1.5M Tbili 0.5M Capital IM Tbill 0.5M Capital IM Capital IM Capital 4M Capital 1.5M 72 Money creation and control: 9 MO = FRnotes in the Fed+ reserve in the Fed =$0.5M+$0.5M+$2M = $3 M Bak X Couna CB Central Bank LENS Ants $ BankY Lab 5 Arti 5 . X Deposit 0.5M Building IM AS Fastes Deposit IM 2SM Deposit Reserve OM Building IM BS Deposit LV 25 Y De Deposit Reme Lom from OM 6.5M MI = deposit and FRnotes held by consumers = $2.5M + $IM + $1.5M =$5M Fastes IM IM BY TBils M OM Curry M 2M IM Here IM Thil OSM Capital IM Thil OSM Capital IM Capital Capital M Capital LSM M1 decreases after Bank X cuts its loans in response to the Fed's open market operation that lows MO. This means that money available to consumers to spend reduces, which will in turn affects the economy. 73