The Treasury usually requires most businesses to regularly deposit taxes withheld from employees into accounts at designated commercial banks. On a regular basis, the funds in these accounts are transferred to the Treasury's account at the Fed. Discuss what is happening to the balance sheet of the banking system as the businesses are making deposits and these tax accounts are increasing. What happens to the banking system's balance sheet when the funds are transferred to the Fed?
What will be an ideal response?
As the deposits are made by businesses the liabilities of the banking system are increased since these deposits are assets for the Treasury and liabilities of the banks. The asset side of the balance sheet is also increasing as these funds are adding to reserves. Once the funds are transferred to the Fed the liabilities are decreased by the amount of the transfer but also assets are decreased as the reserve account of the appropriate banks will be debited by the Fed.
You might also like to view...
Patent laws promote technical progress in all of the following ways except one. Which is the exception?
a. They allow other firms to copy successful products as soon as they are marketed. b. They prevent duplication of inventions. c. They provide a stimulus to innovation. d. They provide the inventor with a temporary monopoly. e. They increase a firm's incentive to incur the up-front costs of developing new products.
Recall the Application about the lack of property rights in Peru, and why clear property rights are important for economic growth in developing countries, to answer the following question(s). According to this Application, in Peru, producing palm oil is very profitable but is a time-consuming process. Producing coca paste, an ingredient in cocaine, is not as costly or as time consuming as the production of palm oil. To switch Peruvian farmers from producing an ingredient used for cocaine to producing the profitable and safe palm oil would require:
A. informal ownership of property. B. cocaine being declared illegal in Peru. C. improvements in finance and the ability to borrow funds. D. governmental approval.