Question

People transfer money from their checking accounts by writing checks or making electronic payments to the Treasury to pay their income taxes. The Fed then clears these payments by transferring funds from the deposits at the Fed of banks whose customers made payments to the Treasury. The Treasury makes no other changes to their deposits at the Fed.

1. What happens to Treasury deposits at the Fed?

2. Are Treasury deposits at the Fed an asset or liability of the Fed?

3. What happens to deposits of banks at the Fed?

4. Are deposits of banks at the Fed an asset or liability of the Fed?

5. Overall what has happened to the Fed’s liabilities?

6. Overall what has happened to the Fed’s assets?

7. Overall what has happened to the liabilities of banks?

8. Overall what has happened to the assets of banks?

9. Overall what has happened to the monetary base?

Answer 1

1) When the treasury issues debt to the public and deposit the proceed at the fed in its general account , bank reserves decline .

2) The US treasury's deposits are a liability on the fed's balance sheet.

3) Federal Reserve Deposits are deposits of gold ,treasury bills placed by United States banks with the Federal Reserve ,the Central Bank.It act as the backing for the banks to create their own deposits in the form of loans to customers or to each other.

4) The commercial banks own their deposits in the fed(reserves),so they count them as assets. The fed owes that money to commercial banks ,so it must count them as liabilities .

5) The size of the fed's liabilities increases or decreases whenever the fed buys or sells it's assets.

6) Anything for which the fed has to pay money ,become the fed's asset.The fed's asset have mainly consisted of government securities and loans extended to member banks through repo and discount window.

7) The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve Notes.Treasury and others hold in accounts at the Federal Reserve Banks.

8) Anything for which the fed has to pay money ,become the fed's asset. So if the fed is buying junk scraps by Paying money, that would become it's assets.

9) When the Federal Reserve creates new funds to purchase bonds from commercial banks, the banks see an increase in their holdings, which causes the monetary base to expand.