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?

Please help! I will rate! Thank you very much!

Answer 1

1.) When ever Treasury deposits money at the Fed in their general account, reserves of the banks will reduce. From this deposit, Treasury withhold some money in their Treasury Tax and Loan accounts existing in the commercial banks. This will help in the smooth-running of the banking business by taking the money in this account as banking reserves.

2.) Treasury deposits involves cash flow of earnings and spending of the Fed government. The deposits of treasury can be considered as a liability on the Fed's balance sheet. Short-term securities of Treasury are the main equivalent assets held by FED.

3.) Federal Reserve Deposits are considered as assets in case of private banks. Federal reserve deposits as well as notes are stated as liabilities of Fed. These deposits and notes are given by the Fed to take back gold, treasury bills etc. These taken back gold, treasury bills etc. can be considered as assets of Fed.

4.) When a bank have deposit of money, it will be considered as their liability because banks should pay it off later to the depositor with interest. Hence, by assuming this concept, money deposited by treasury in Fed reserves will be considered as the treasury's assets. According to Fed, it will be a liability.

5.) Liability of Federal Bank will increase due to the deposit of income tax liability from the treasury bank.

6.) Asset of Federal Bank will be maintained equivalent to the liability.

7.) Liability of the banks will reduce.

8.) Assets of banks will increase.

9.) When a person deposits a check in a bank and that bank sends the check to Fed, then Federal reserves will be increased and thus monetary base will rise as the amount of deposits increases in Fed.