In July of this year (2015), Janet Yellen said the following in her testimony before the House Committee on Financial Services:
If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.
In raising the federal funds rate, the Fed would likely start to sell some of the Treasury securities that it holds.
a. How would this policy change affect the size of the Fed's balance sheet? In your answer, discuss how each side of the balance sheet (assets and liabilities) would change. Would one or both sides increase or decrease?
b. Suppose the Fed sells $1 billion worth of Treasury securities to banks. How would this action change the size of the monetary base? If banks are required to hold 10% of their deposits as reserves, what would be the final change in the money supply (assume we're talking about M1) as implied by the "money multiplier"?
c. Is the change in the money supply that you calculated in part (b) likely to occur in reality? Why or why not? Would you expect the actions of the Fed to have any meaningful influence on the size of the money supply at this point? Hint: For the last part of this question, you might think about the factors that influence a bank's decision to lend as well as the current supply of excess reserves in the banking system (see https://research.stlouisfed.org/fred2/series/EXCSRESNS).
In July of this year (2015), Janet Yellen said the following in her testimony before the House Committee on Financial Services:
If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy.
In raising the federal funds rate, the Fed would likely start to sell some of the Treasury securities that it holds.
a. How would this policy change affect the size of the Fed's balance sheet? In your answer, discuss how each side of the balance sheet (assets and liabilities) would change. Would one or both sides increase or decrease?
b. Suppose the Fed sells $1 billion worth of Treasury securities to banks. How would this action change the size of the monetary base? If banks are required to hold 10% of their deposits as reserves, what would be the final change in the money supply (assume we're talking about M1) as implied by the "money multiplier"?
c. Is the change in the money supply that you calculated in part (b) likely to occur in reality? Why or why not? Would you expect the actions of the Fed to have any meaningful influence on the size of the money supply at this point? Hint: For the last part of this question, you might think about the factors that influence a bank's decision to lend as well as the current supply of excess reserves in the banking system (see https://research.stlouisfed.org/fred2/series/EXCSRESNS).
