Open Market Operations (Using T-Accounts) ECON 102 (Principles of Macroeconomics) Alan Gin Spring 2012

Increasing the Money Supply To increase the money supply, the Federal Reserve would buy securities This is done through the Federal Reserve Bank of New York

Step 1: Fed buys $100M in securities Federal Reserve Assets Liabilities + S.E. Bank of America Assets Liabilities + S.E.

Step 1: Fed buys $100M in securities Federal Reserve Assets Liabilities + S.E. Securities +100M Bank of America Assets Liabilities + S.E. Securities -100M $100M in securities goes from Bank of America to the Federal Reserve

Step 2: Fed pays Bank of America for the securities Federal Reserve Assets Liabilities + S.E. Securities +100M Bank of America Assets Liabilities + S.E. Securities -100M The Fed credits Bank of America’s account with $100M

Step 2: Fed pays Bank of America for the securities Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M Bank of America Assets Liabilities + S.E. Securities -100M Reserves +100M The Fed credits Bank of America’s account at the Fed with $100M

Step 3: Bank of America makes loans of $100M Assets Liabilities + S.E. Securities -100M Reserves +100M Wells Fargo Assets Liabilities + S.E. Bank of America makes loans of $100M, which are deposited to an account at Wells Fargo

Step 3: Bank of America makes loans of $100M Assets Liabilities + S.E. Securities -100M Reserves +100M Loans +100M Wells Fargo Assets Liabilities + S.E.

Step 3: Bank of America makes loans of $100M Assets Liabilities + S.E. Securities -100M Reserves +100M Loans +100M Wells Fargo Assets Liabilities + S.E. Deposits +100M

Step 4: Money is transferred from Bank of America to Wells Fargo Assets Liabilities + S.E. Securities -100M Reserves +100M Loans +100M Wells Fargo Assets Liabilities + S.E. Deposits +100M When the check is cleared, money is transferred from Bank of America to Wells Fargo

Step 4: Money is transferred from Bank of America to Wells Fargo Assets Liabilities + S.E. Securities -100M Reserves +100M Reserves -100M Loans +100M Wells Fargo Assets Liabilities + S.E. Reserves +100M Deposits +100M When the loan check is cleared, money is transferred from Bank of America to Wells Fargo

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M Bank of America Assets Liabilities + S.E. Securities -100M Reserves +100M Reserves -100M Loans +100M $100M is transferred from Bank of America’s account at the Fed . . .

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Bank of America Assets Liabilities + S.E. Securities -100M Reserves +100M Reserves -100M Loans +100M $100M is transferred from Bank of America’s account at the Fed . . .

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Wells Fargo Assets Liabilities + S.E. Reserves +100M Deposits +100M . . . to Wells Fargo’s account at the Fed.

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Reserves (Wells Fargo) +100M Wells Fargo Assets Liabilities + S.E. Reserves +100M Deposits +100M . . . to Wells Fargo’s account at the Fed.

Step 6: Part of the reserves received by Wells Fargo are required reserves Assets Liabilities + S.E. Reserves +100M Deposits +100M Chase Assets Liabilities + S.E. Because deposits were made at Wells Fargo, 10% (since rr = 0.10) must be kept as required reserves

Step 6: Part of the reserves received by Wells Fargo are required reserves Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Deposits +100M Chase Assets Liabilities + S.E. Because deposits were made at Wells Fargo, 10% (since rr = 0.10) must be kept as required reserves

Step 7: Wells Fargo Makes Loans of $90M Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Deposits +100M Chase Assets Liabilities + S.E. Wells Fargo makes loans of $90M, which are deposited to an account at Chase

Step 7: Wells Fargo Makes Loans of $90M Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Loans +90M Deposits +100M Chase Assets Liabilities + S.E.

Step 7: Wells Fargo Makes Loans of $90M Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Loans +90M Deposits +100M Chase Assets Liabilities + S.E. Deposits +90M

Step 8: Money is transferred from Wells Fargo to Chase Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Reserves -90M Loans +90M Deposits +100M Chase Assets Liabilities + S.E. Reserves +90M Deposits +90M When the loan check is cleared, money is transferred from Wells Fargo to Chase

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Reserves (Wells Fargo) +100M Wells Fargo Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Reserves -90M Loans +90M Deposits +100M $90M is transferred from Wells Fargo’s account at the Fed . . .

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Reserves (Wells Fargo) +100M -90M Wells Fargo Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Reserves -90M Loans +90M Deposits +100M $90M is transferred from Wells Fargo’s account at the Fed . . .

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Reserves (Wells Fargo) +100M -90M Chase Assets Liabilities + S.E. Reserves +90M Deposits +90M . . . to Chase’s account at the Fed.

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities +100M Reserves (Bank of America) +100M -100M Reserves (Wells Fargo) +100M -90M Reserves (Chase) +90M Chase Assets Liabilities + S.E. Reserves +90M Deposits +90M . . . to Chase’s account at the Fed.

Step 10: Part of the reserves received by Chase are required reserves Wells Fargo Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Reserves -90M Loans +90M Deposits +100M Chase Assets Liabilities + S.E. Reserves +90M Deposits +90M Because deposits were made at Chase, 10% (since rr = 0.10) must be kept as required reserves

Step 10: Part of the reserves received by Chase are required reserves Wells Fargo Assets Liabilities + S.E. Reserves +100M Required Reserves +10M Excess Reserves +90M Reserves -90M Loans +90M Deposits +100M Chase Assets Liabilities + S.E. Reserves +90M Required Reserves +9M Excess Reserves +81M Deposits +90M Because deposits were made at Chase, 10% (since rr = 0.10) must be kept as required reserves

Decreasing the Money Supply To increase the money supply, the Federal Reserve would sell securities This is done through the Federal Reserve Bank of New York

Step 1: Fed sells $200M in securities Federal Reserve Assets Liabilities + S.E. Bank of America Assets Liabilities + S.E. $200M in securities goes from the Federal Reserve to Bank of America

Step 1: Fed sells $200M in securities Federal Reserve Assets Liabilities + S.E. Securities -200M Bank of America Assets Liabilities + S.E. Securities +200M $200M in securities goes from the Federal Reserve to Bank of America

Step 2: Bank of America pays the Fed for the securities Federal Reserve Assets Liabilities + S.E. Securities -200M Bank of America Assets Liabilities + S.E. Securities +200M The Fed reduces Bank of America’s account by $200M

Step 2: Bank of America pays the Fed for the securities Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M Bank of America Assets Liabilities + S.E. Securities +200M Reserves -200M The Fed reduces Bank of America’s account by $200M

Step 3: Bank of America reduces its loan portfolio by $200M Assets Liabilities + S.E. Securities +200M Reserves -200M Citibank Assets Liabilities + S.E. Loans of $200M are repaid to Bank of America with checks from accounts at Citibank

Step 3: Bank of America reduces its loan portfolio by $200M Assets Liabilities + S.E. Securities +200M Reserves -200M Wells Fargo Assets Liabilities + S.E. Deposits -200M

Step 3: Bank of America reduces its loan portfolio by $200M Assets Liabilities + S.E. Securities +200M Reserves -200M Loans -200M Citibank Assets Liabilities + S.E. Deposits -200M

Step 4: Money is transferred from Citibank to Bank of America Assets Liabilities + S.E. Securities +200M Reserves -200M Loans -200M Citibank Assets Liabilities + S.E. Deposits -200M When the check is cleared, money is transferred from Citibank to Bank of America

Step 4: Money is transferred from Citibank to Bank of America Assets Liabilities + S.E. Securities +200M Reserves -200M Reserves +200M Loans -200M Citibank Assets Liabilities + S.E. Reserves -200M Deposits -200M When the check is cleared, money is transferred from Citibank to Bank of America

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M Bank of America Assets Liabilities + S.E. Securities +200M Reserves -200M Reserves +200M Loans -200M $200M is transferred to Bank of America’s account at the Fed . . .

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Bank of America Assets Liabilities + S.E. Securities +200M Reserves -200M Reserves +200M Loans -200M $200M is transferred to Bank of America’s account at the Fed . . .

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Citibank Assets Liabilities + S.E. Reserves -200M Deposits -200M . . . from Citibank’s account at the Fed.

Step 5: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Reserves (Citibank) -200M Citibank Assets Liabilities + S.E. Reserves -200M Deposits -200M . . . from Citibank’s account at the Fed.

Step 6: Part of the reserves lost by Citibank are required reserves Assets Liabilities + S.E. Reserves -200M Deposits -200M PNC Assets Liabilities + S.E. Because deposits were reduced at Citibank, 10% (since rr = 0.10) are no longer needed as required reserves

Step 6: Part of the reserves lost by Citibank are required reserves Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Deposits -200M PNC Assets Liabilities + S.E. Because deposits were reduced at Citibank, 10% (since rr = 0.10) are no longer needed as required reserves

Step 7: Citibank reduces its loan portfolio by $180M Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Deposits -200M PNC Assets Liabilities + S.E. Loans of $180M are repaid to Citibank with checks from accounts at PNC

Step 7: Citibank reduces its loan portfolio by $180M Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M PNC Assets Liabilities + S.E. Deposits -180M

Step 7: Citibank reduces its loan portfolio by $180M Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Loans -180M PNC Assets Liabilities + S.E. Deposits -180M

Step 8: Money is transferred from PNC to Citibank Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Reserves +180M Loans -180M Deposits +100M PNC Assets Liabilities + S.E. Reserves -180M Deposits -180M When the loan check is cleared, money is transferred from PNC to Citibank

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Reserves (Citibank) -200M Citibank Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Reserves +180M Loans -180M Deposits -200M $180M is transferred to Citibank’s account at the Fed . . .

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Reserves (Citibank) -200M +180M Citibank Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Reserves +180M Loans -180M Deposits -200M $180M is transferred to Citibank’s account at the Fed . . .

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Reserves (Citibank) -200M +180M PNC Assets Liabilities + S.E. Reserves -180M Deposits -180M . . . from PNC’s account at the Fed.

Step 9: The transfer of funds occurs at the Federal Reserve Assets Liabilities + S.E. Securities -200M Reserves (Bank of America) -200M +200M Reserves (Citibank) -200M +180M Reserves (PNC) -180M PNC Assets Liabilities + S.E. Reserves -180M Deposits -180M . . . from PNC’s account at the Fed.

Step 10: Part of the reserves lost by PNC are required reserves Citibank Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Reserves +180M Loans -180M Deposits +100M PNC Assets Liabilities + S.E. Reserves -180M Deposits -180M Because deposits were reduced at PNC, 10% (since rr = 0.10) are no longer needed as required reserves

Step 10: Part of the reserves lost by PNC are required reserves Citibank Assets Liabilities + S.E. Reserves -200M Required Reserves -20M Excess Reserves -180M Reserves +180M Loans -180M Deposits +100M PNC Assets Liabilities + S.E. Reserves -180M Required Reserves -18M Excess Reserves -162M Deposits -180M Because deposits were reduced at PNC, 10% (since rr = 0.10) are no longer needed as required reserves