Suppose that there is widespread default in mortgages. The market has frozen and the MBS are now worth nothing. The Fed has decided to prop up the banking sector by purchasing $80mil of MBS (non-traditional OMOs). Show all respective changes on the balance sheets and highlight in yellow

Entries

$100 million in mortgage-backed securities (MBS)

$200 million demand deposits

$20 million in reserves held by banks

$100 million in Treasury securities held by banks

$50 million in Treasury securities held by the Fed

$5 million in overnight borrowing by banks from the Fed

Households Banks Federal Reserve Firms

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Answer rating: 100% (QA)

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