T accounts for Fed Reserve Board and commercial banks?

Question

How would the T accounts change for the Federal Reserve Board and for commercial banks if the Federal Reserve Board buys $50 million in bonds, if people choose to hold $5 million more in cash than they did before?

Answer 1

When theFed buys up $50 million bonds, it credits the bank accounts of the seller of bonds by equivalent amount. So in the Fed T account, the reserves (deposits) of the commercial banks go up $50 million on the liability side AND AT THE SAME TIME the libiality head Borrowings by way of bonds goes doen by $59 million. Immediately, the banks' liability item deposits in checking account increases by $50 million and simultaneously the Banks' asset item Reserves with the Fed increases by $50 million. But soon deposits will go down by $5 million as the people now want to hold $5million more cash. So the banks' liability side item of depositsdecilnes by $5 million and so does the banks' assets side entry item casn in hand/ vaults decrease by $5 million. So the net effect is a rise in deposit liability by $45 million and increase in Reserves includinmg deposits with the FRB and cash in vault / in hand increases by $45 million.

After this the T account position will again change as the banks try to lend the excess liquidity (reserves with Fedf. The final positiion can be known once we have the assumption of cash reserve ratio and hence can work out the final T accounts.