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Every transaction is conducted with electronic money. Case 1: (OMP) The Fed purchases $100M of...

Question:

Every transaction is conducted with electronic money.

Case 1: (OMP) The Fed purchases $100M of T-bills from banks. Banks do not lend out

Case 2: (QE) The Fed purchases $300B of AMBS from mutual funds. Banks do not lend out.

Case 3: (Helicopter money) The Fed sends checks to everybody with total value $100B. Banks do not lend out.

Write T-account for the Fed, banks and public in each case.

Treasury Bills:

Treasury bills are also called T-Bills. It is a short term instrument which is used by the government of the United States. The government sells T-bills to borrow money from banks and the public. It has a short term maturity of less than one year or up to one year.

Answer and Explanation:

Case 1: (OMP) The Fed purchases $100M of T-bills from banks. Banks do not lend out.

T-account for Fed

Liability Amount($) Asset Amount($)
Treasury Bills +$100 M Reserves for Bank +$100 M

T-account for Banks

Liability Amount($) Asset Amount($)
Treasury Bills -$100 M - -
Deposit at Fed +$100 M - -

In case 1 there is a transaction between the Fed and banks. There is no public involvement in it as banks do not lend the money.

Case 2: (QE) The Fed purchases $300B of AMBS from mutual funds. Banks do not lend out.

T-account for Fed

Liability Amount($) Asset Amount($)
AMBS Securities +$350 B Reserves +$ 350 B

The Federal purchases securities of $300 B from mutual funds and interest or charges on it are accordingly charged. The Fed is involved in this transaction, so the account of the Fed is only maintained.

Case 3: (Helicopter money) The Fed sends checks to everybody with a total value of $100B. Banks do not lend out.

T-account for Fed

Liability Amount($) Asset Amount($)
Sending Checks +$100 B Reserves - $100 B

T-account for Public

Liability Amount($) Asset Amount($)
Purchasing Helicopter - $100 B Cash Received $100 B

In case 3 the Fed and Public are involved, so the T- account is maintained for both involved in the transaction.


Learn more about this topic:

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Government Securities: Definition, Types & Examples

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 12
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