(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
The final step is to analyze how the open-market purchase changes money supply and loans.
(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 open-market purchase will cause commercial banks to have 50 million dollars in excess reserves.
(Description)
Show the final balance sheet for commercial banks after the money creation process (use plus to indicate an increase and minus to indicate a decrease). Table with two columns - Assets and Liabilities - is presented. Assets two first values are "Reserves blank million dollars" and "Treasury Bills blank million dollars".
(Speaker)
Assuming banks do not want to hold excess reserves, they will create more loans. These loans will circulate through the economy, creating additional checkable deposits.
(Description)
Assets third value "Loans blank million dollars" is inserted in the table. Liabilities first value "Checkable deposits blank million dollars" is inserted in the table.
(Speaker)
These deposits will create additional excess reserves, allowing banks to make more loans. The open-market purchase will have multiple effects on a commercial bank's balance sheet. The purchase will increase loans, reserves, and checkable deposits but decrease treasury holdings. We have entered the signs into the balance sheet.
(Description)
Signs are entered in the blanks: plus for Reserves, Loans and Checkable deposits; minus for Treasury Bills.
(Speaker)
To determine the change in loans and checkable deposits, we need to calculate the money multiplier. The money multiplier is 1 divided by the reserve rate. In this problem, the reserve rate is 10 percent. So the money multiplier is 1 divided by 0.10, or 10. A money multiplier equal to 10 implies a 1 dollar increase in excess reserves will create a 10 dollar increase in the monetary base.
(Description)
Change in monetary supply equals money multiplier times open market purchase. Change in monetary supply equals 10 times 50 million dollars equals 500 million dollars.
(Speaker)
For this problem, the Federal Reserve conducted a 50 million dollar purchase, which will cause the monetary supply, via an increase in checkable deposits, to increase by 500 million dollars. Now we need to put everything together. Previously we found the change in reserves equal to 50 million dollars. And treasury bills decreased by 50 million dollars. In the last part, we found the monetary supply through the checkable deposits increased by 500 million dollars. The increase in checkable deposits was created through 500 million dollars of new loans. To verify we have updated the balance sheet correctly, the change in assets should equal the change in liabilities.
(Description)
Values are inserted in the table. Reserves - plus 50 millions, Treasury bills - minus 50 millions, Loans - plus 500 millions, Checkable deposits - plus 500 millions.