Suppose that the Fed purchases from bank B some bonds in the open market and that, before the sale of bonds, bank B had no excess reserves.
a) Describe what initially happens to the reserves of bank B.
b) If bank B does not want to hold excess reserves, what will it do with the money received from the sale of bonds to the Fed?
c) Why do we expect, at least in usual times, that the amount of checking deposits in the economy will go up? Describe briefly the various "rounds" of this process.
d) Now suppose that minimum required reserve ratio for banks is 1/10. Also suppose that banks hold no excess reserves and that currency in circulation is unchanged from the purchase of bonds. If the Fed buys $20 billions of bonds from bank B, what will be the exact change in checking deposits, loans and reserves?