4. This exercise is on the Federal Reserve Bank's use of open market operations. Assume that the Fed sells a government hond of $2.000 to Mrs. Brown who withdraws cash from her demand account in Bank Y to pay for the bond. Tbe Fed keeps the money from the bond in its vaults. Assume a 15% reserve requirement system. Bank Y's balance sheet looks as below before Mrs. Brown withdraws $2,000 in cash to pay for the bond. Bank Y: Balance Sheet Liabilities Assets Reserves Loans Securities 4,500 14,000 11.500 Demand Deposits: Mrs. Brown Others 4,000 26,000 Total 30,000 Total 30,000 (a) Show the impact of Mrs. Brown's withdrawal on Bank Y's balance sheet. Bank Y: Balance Sheet (after Mrs. Browns' withdrawal) Assets Liabilities Reserves Loans Securities Demand Deposits: Ms. Brown Others Total Total (b) How much does Bank Y need to replenish deficient bank reserves? (c) Assume that Bank Y gets funds to replenish deficient reserves by selling some of its securities to Mr. Roads who has a demand deposit account at Bank Z. Roads pays for these securities by withdrawing cash from his demand deposits at Bank Z and turning that cash over to Bank Y. i) Show the impact on Bank Y's Balance when this happens. Bank Y: Balance Sheet Assets Liabilities Reserves Loans Securities Total Demand Deposits Ms. Brown Others Total ii) Assume Bank Z's Balance Sheet to be as noted below. (Note: This is before Mr. Roads draws on his demand deposit to pay for the securities purchased from Bank Y.) Bank Z: Balance Sheet Liabilities Assets Reserves Loans Securities Total 3,000 8,500 8,500 20,000 Demand Deposits: Mr. Roads Others Total 4,000 16,000 20,000 (d) How will Bank Z react? (What will it do and in what amount?) te) i) What is the decrease so far in the money supply as a result of the original sale of the $2,000 bond by the Fed to Mrs. Brown? i) What is the total decrease in money supply as a result of the original withdrawal and subsequent "loss" of $2,000 by Mrs. Brown? (That is, what is the total "multiple contraction" after all banks in the banking system have adjusted?) (f) Is this drop comprised of Demand Deposits, currency in circulation or both? Explain your answer. 5 Assume the Federal Reserve Board