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Chapter 15: Q.20 (page 410)

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.

Short Answer

Expert verified

The checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank is grows by 2 million dollars.

Step by step solution

01

Concept introduction

A T-account is a casual word for a group of monetary records that utilizesdouble-entry bookkeeping. The word defines the appearance of the bookkeeping access. First, a big note T is sketched on a page

02

Explanation

Checkable Deposits A/cDebitCreditParticularsAmountParticularsAmountBalance2000000Bank200000020000002000000

The balance of the checkable deposits grows by 2 million dollars.

03

Final answer

The checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank is grows by 2 million dollars.

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Most popular questions from this chapter

Go to http://www.federalreserve.gov/releases/h6/hist/ and find the historical report of M1 and M2 by clicking on the 鈥淒ata Download Program.鈥� Compute the growth rate of each aggregate over each of the past three years. Does it appear that the Fed has been increasing or decreasing the rate of growth of the money supply? Is this consistent with your understanding of the needs of the economy? Why?

If you decide to hold \(100 less cash than usual and therefore deposit \)100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant?

In October 2008, the Federal Reserve began paying interest on the amount of excess reserves held by banks. How, if at all, might this affect the multiplier process and the money supply?

What effect might a financial panic have on the money multiplier and the money supply? Why?

If the Fed sells $2million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
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