If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what...

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If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what will the T- account of the banking system

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Answer 1

Answer #1

If FED reduces reserves by selling 5 million worth of bonds to the banks

T-account of banking system in equilibrium

Reserves will decreased by 5 million
Securities will increase by 5 million
Loan will reduced by 50 million (as reserve ratio is 10%, 5 million/ 0.10)

Checkable deposits will reduced by 50 million

Change of Deposit = 1 / rr x Change of Reserves

= 1/0.1 *-5 = -50 million.

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Answer 2

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