Suppose the Federal Reserve (Fed) decides to sell $100 million in Treasury bills on the open market. Further suppose that the Fed’s order is matched with a buy order from a member of the non-bank public. Assume the non-bank public deposits half of the proceeds from the sale in its account at Bank of America and takes the other half as cash. Using T-accounts, show what happens to the balance sheets of the non-bank public, Bank of America, and the Fed. Then, explicitly state rather the monetary base increased or decreased and by how much. Next, show graphically the impact of this change in the monetary base on money supply and the federal funds rate.

Answer rating: 100% (QA)

Balance sheet of Non banking Public Assets Liabilities 50 Million in Cash Bank of America Assets Li... View the full answer