Like problem in the text, this exercise shows how the money supply can be changed. The focus of this exercise is open-market policy. Suppose the Fed wants to expand the money supply using open-market operations and it is faced with the balance sheet of the banking system as shown in Table 14.3. Suppose further that: The banking system initially has no excess reserves. The reserve requirement is 0.20. The banks make loans in the full amount of any excess reserves that they acquire, All loans flow back into the banking system as transactions deposits. Table 14.3. Balance sheet of banking system (millions of dollars) Total reserves Required, $60. Excess, 50 Total Securities Loans Total $ 60 Transactions accounts $300 Total reserves Required, Excess,. Securities Loans 80 160 $300 Total 1. Suppose the Open Market Committee buys $10 million of securities from the commercial banking system. In Table 14.4 show the changes and new totals for the various accounts on the balance sheet of the commercial banks after this transaction but before any new loans are made or called in. Table 14.4 Balance sheet of commercial banking system after FOMC buys $10 million of securities (millions of dollars) $300 Transactions accounts S Total 2. Suppose the banking system now expands its loans and transactions accounts by the maximum amount it can on the basis of its in excess reserves. 3. THE total LENDing System will 3. The total lending capacity for the banking system will increase by 4. Assume banks fully utilize their new lending capacity. In Table 14.5 complete the balance sheet for the banking system showing the new totals for all of the accounts after loans have been made. (Remember: The reserve ratio is 0.20.) Total reserves Required,. Excess, Table 14.5 Balance sheet of banking system after expansion of loans and deposits (millions of dollars) Securities Loans capacity for the banking by iNere Are Total 192 6. Required reserves have gone up by 7. Loans have increased by Transactions accounts Total S. As a result of the open-market operations, the money supply has expanded by a total of