Assume that a bank has the following simplified balance sheet, and is operating at its desired liquidity
Question:
Assume that a bank has the following simplified balance sheet, and is operating at its desired liquidity ratio.
Liabilities | (£m) | Assets | (£m) | |
Deposits | 100 —— 100 | Balances with the central bank Advances | 10 90 —— 100 |
Now assume that the central bank repurchases £5 million of government bonds on the open market. Assume that the people who sell the bonds all have their accounts with this bank.
(a) Draw up the new balance sheet directly after the purchase of the bonds.
(b) Now draw up the eventual balance sheet after all credit creation has taken place.
(c) Would there be a similar effect if the central bank rediscounted £5 billion of Treasury bills?
(d) How would such open market operations affect the rate of interest?
Balance SheetBalance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Question Posted: