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The following table shows the initial balance sheets of BankAvarice and The Federal Reserve (The Fed). Suppose that The Fed then sells $50 million in
The following table shows the initial balance sheets of BankAvarice and The Federal Reserve (The Fed). Suppose that The Fed then sells $50 million in treasury bonds to BankAvarice. a) What are total assets and total liabilities for BankAvarice after the transaction? Write down the new balance sheet for BankAvarice. b) Excess reserves are reserves that banks hold beyond what they are required to hold to meet their reserve requirement. Assume that the reserve ratio is 10%. What are excess reserves for BankAvarice before and after the transaction? What are the pros and cons for BankAvarice of holding excess reserves? c) What are total assets and total liabilities for the Fed after the transaction? Assume the proceeds are held by BankAvarice in Fed reserves (as opposed to, for example, cash) to take advantage of the essentially risk-free federal funds rate. Write down the new balance sheet for the Fed d) Why would the Fed conduct such a transaction
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