Suppose that JPMorgan Chase sells $100 million in Treasury bills to the Fed.
a. Use T-accounts to show the initial effect of this sale on the balance sheets of JPMorgan Chase and the Fed.
b. Suppose that before selling the Treasury bills, JPMorgan Chase had no excess reserves. Suppose that the required reserve ratio is 20%. Suppose that JPMorgan Chase makes the maximum loan possible from the funds acquired by selling the Treasury bills. Use a T-account to show the initial effect of granting the loan on JPMorgan Chase’s balance sheet. Also include on this T-account the transaction from part (a).
c. Now suppose that whoever took out the loan in part (b) writes a check for this amount and that the person receiving the check deposits it at Wells Fargo. Show the effects of these transactions on the balance sheets of JPMorgan Chase and Wells Fargo after the check has cleared. (On the T-account for JPMorgan Chase, include the transactions from parts (a) and (b).)
d. What is the maximum increase in the money supply that can result from the transaction in part (a) (that is, the maximum increase after all actions resulting from the transaction in part (a) have occurred)?