Ch.15 The Fed and Monetary Policy

Problem 4 and 5 are adapted from Openstax ch.15 review question 24 and problem 38.

1.Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank.

a.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 250; Liabilities - deposits 300 and equity 30. (Section 15.3)

b. Assume the required reserve ratio is 0.1 and other things stay the same, how much is the total change in money supply after the open market purchase of $10 million in Treasury bonds by the Fed? (Section 14.4 and 15.3)

2. What kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why? (Section 15.4)