Bank Balance

Boise Bank has the simplified balance sheet below. Study the balance sheet and then answer the questions that follow.

Asset l liabilities

required reserves $2000 l Demand deposits $10000

Excess reserves $0 l Owner's equity $10000

Customer loans $8000 l

Government securities $7000 l

Building and fixtures $3000 l

(a) Based on Boise Bank's balance sheet, calculate the required reserve ratio.

(b) Suppose that the Federal Reserve purchases $5,000 worth of bonds from Boise Bank. What will be the change in the dollar value of each of the following immediately after the purchase?

(i) Excess reserves

(ii) Demand deposit

(c) Calculate the maximum amount that the money supply can change as a result of the $5,000 purchase of bonds by the Federal Reserve.

(d) When the Federal Reserve purchases bonds, what will happen to the price of bonds in the open market? Explain.

(e) Suppose that instead of the purchase of bonds by the Federal Reserve, an individual deposits $5,000 in cash into her checking (demand deposit) account. What is the immediate effect of the cash deposit on the M1 measure of the money supply?