Principles of Macroeconomics / Unit 12 MAC 1115 worked example, 60 to 90 seconds
Walking a Balance Sheet Through a Purchase
The idea
Take an open market purchase to the balance sheet and name what moves at each step. The engine of the whole exercise is that the bank has a desired level of reserves and returns to it after any disturbance. State that level first, because every second step is the bank restoring it.
In practice
Use unit eleven's bank: reserves 600, loans 3,900, bonds 500, deposits 4,500, so net worth is 500, and its desired reserve level is 600. Step one, the central bank buys 200 of its bonds: bonds fall to 300 and reserves rise to 800. Total assets are still 5,000 and net worth is still 500. Step two, the bank now holds 200 more reserves than it wants. Step three, it lends the 200 out: loans rise to 4,100 and reserves return to 600. Only the composition of assets changed.
Where people slip
Notice where the money supply changed. Step one created the capacity to lend and changed no deposits. Step three created the deposits, and that is the money. The new loan is round one of unit eleven's lending chain, so the two models join exactly here.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics