The Fed buys $100,000 worth of U.S. Treasury bonds in an open market purchase. Assume that the reserve requirement is 10 percent, the banking system as a whole holds no excess reserves, and that the nonbank public is holding all the currency it wants. Show the impact of this injection of reserves, assuming that some banks in the system choose to purchase securities rather than to make loans with the increase in reserves.
2006-12-15 02:59:55 · 3 answers · asked by johnmclain1 1 in Business & Finance ➔ Investing
Your question is all not right. The reserves are as you say is not injected into the banking system. The Bankd deposits it with larger banks of the Fed Reserve system where it is held in reserve. They cannot touch it afterwards. The Fed can use it to create Euro dollars or SDR's or even lent it out to stock brokers at a lower rate to finance margine trading. If the banks lent out more loan than they are allowed then they have to cover it up with overnight borrowing from the discount window for mainatianing the reserve requirement. Whe the situation is as I have stated then your whole hypothetical situation has to be rephrased for pursposful outcomes.
$100000 pumped into the economy mind inturn increase consumption or more savings and more reserves back into the Fed's hand. Since the money velocity is around15 this will be worth 1.5 million dollars. 150000 new reserves are added back, which the Fed will use as it pleases may be fund for overnight window. Currency held by public is enough for this situation to take place. These are some precievable scenarios. The fact is these things are not random as you state. There are specific situations when this happens and you have to come up with a practical scenario in an elaborat fashion.
Former consultant to Fed Reserve USA.
2006-12-15 05:32:19 · answer #1 · answered by Mathew C 5 · 1⤊ 0⤋
If the Fed offered $5/billion in Bonds, it would pump $5/billion into the monetary gadget. Throw contained in the fractional reserve banking into the mixture and its extra like $50/billion is being extra to the monetary gadget. The Fed receives the Bonds and the monetary gadget receives the money. might want to the fed favor to extract money from the monetary gadget, it would promote those bonds and take money out of the monetary gadget in substitute for bonds.
2016-11-26 21:03:58 · answer #2 · answered by Anonymous · 0⤊ 0⤋
OK thank you for that info.
2006-12-15 03:09:33 · answer #3 · answered by jc 2 · 0⤊ 0⤋