Answer to Question #51265 in Macroeconomics for bob

Question

Suppose the consolidated balance sheet of an economy’s banking system is shown in the following table:
Assets: Liabilities:
Currency 10 Deposits 2000
Deposits at the central bank 90
Government Bonds 300
Loans Outstanding 1800 Capital 200
Total 2200 Total 2200
In answering the following questions, assume that the banking system is initially in equilibrium and that
the public holds all of its money in the form of deposits in the banking system.
(b) Suppose the central bank buys $50 worth of government bonds from the banking system. Show the effect of this transaction on the balance sheet before any new loans can be made, or any old loans are called. Is the banking system still in equilibrium? Has the money supply changed?

Answer 1

Assets: Liabilities:
Currency 10 Deposits 2000
Deposits at thecentral bank 90
Government Bonds300
Loans Outstanding1800 Capital 200
Total 2200 Total 2200
In answering thefollowing questions, assume that the banking system is initially in equilibrium
and that the public holds all of its money in the form of deposits in the banking
system.
(b) Suppose thecentral bank buys $50 worth of government bonds from the banking system. Show
the effect of this transaction on the balance sheet before any new loans can be
made, or any old loans are called.
Is the banking system still in equilibrium? Has the moneysupply changed?

Solution
The effect of this transaction will be the following:
Assets: Liabilities:
Currency 10+50 =60 Deposits 2000
Deposits at thecentral bank 90
Government Bonds300-50=250
Loans Outstanding1800 Capital 200
Total 2200 Total 2200
So, the banking system is still in equilibrium.
Money supply is the total amount of monetary assetsavailable in an economy at a specific time. So, money supply will increase by
$50.