Principles of Macroeconomics / Unit 12 MAC 1116 worked example, 60 to 90 seconds
Walking a Balance Sheet Through a Sale
The idea
Now run an open market sale through the same bank, keeping one side as the subject throughout so the direction never blurs. Say the central bank sells and the commercial bank buys, and describe every step from the commercial bank's books.
In practice
The bank starts again at reserves 600, loans 3,900, bonds 500 and deposits 4,500. Step one, it buys 200 of bonds from the central bank: reserves fall to 400 and bonds rise to 700. Assets are still 5,000 and net worth is still 500. Step two, reserves are now 200 below the desired 600. Step three, the bank reduces its loans by 200, to 3,700, and reserves return to 600. Contraction works by shrinking lending, which is the mirror of the purchase case.
Where people slip
Total assets and net worth were unchanged in both directions, which is worth stating plainly because it looks wrong. What changed for the economy is the quantity of loans and therefore of deposits. The bank is no richer or poorer either way; the money supply is what moved.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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