(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
In this chapter, you learned how to use T-accounts to model changes in the money supply. In this question, you will be asked to use a T-account and show the effects of an open market purchase by the federal reserve.
(Description)
The problem is given. Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys 50 million dollars in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10 percent, and banks hold no excess reserves.
(Speaker)
The federal reserve purchases 50 million dollars in US Treasury Bills and banks are subject to a 10 percent minimum reserve ratio, and hold no excess reserves. The first step is to show the initial purchase on the federal reserve balance sheet. And open market purchase buying 50 million dollars of US Treasury Bills will increase assets on the balance sheet, but also create a liability.
(Description)
Show the initial change in the balance sheet for Federal Reserve (use plus to indicate an increase and minus to indicate a decrease). Table with two columns - Assets and Liabilities - is presented. Assets value is "Treasury Bills blank million dollars", liabilities value is "Monetary base blank million dollars".
(Speaker)
Liabilities increase as the federal reserve issues more reserves. In this problem, the federal reserve will realize an increase of 50 million dollars in assets, but also an increase of 50 million dollars in liabilities, in the form of an increase in the monetary base. Remember, any change to assets must have a corresponding change to liabilities. Assets must equal liabilities.
(Description)
Values of plus 50 million dollars are inserted into the blanks for assets and liabilities.