Assume that the banking system has no excess reserves. The combined balance sheet of all chartered banks is (in million of dollars)
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ASSETS
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LIABILITIES
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Reserves $15,000
Securities and loans $135,000
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$150,000 Deposits
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$150,000
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$150,000
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Suppose the general public purchase $500 million in government bonds and pay for them by drawing cheques on their chartered bank deposits.
(i) Calculate the (target) reserve requirement.
(ii) What is the immediate effect on chartered bank reserves and deposits? Provide the balance sheet.
What is the ultimate effect on chartered bank reserves, deposits, and loans? Provide the final balance sheet.