Q.23 Suppose the central bank of your... [FREE SOLUTION]

Chapter 15: Q.23 (page 411)

Suppose the central bank of your country increases reserves by purchasing $1 million worth of bonds from banks and that the banking system in your economy is in equilibrium. What will happen to the level of checkable deposits? Use T-accounts to explain your answer.

Short Answer

Expert verified

The level of checkable deposits will increases with the growth in bonds or either in form of a loan also.

Step by step solution

Introduction

Central bank is the apex monetary authroity in an economy. It is repsonsoble for currency circulation, controls money supply, acts as a banker to the government and to commerical banks,and performs several other functions.

Explanation

Checkable deposits are those deposits held by the bank or any financial institution as a medium for people so that they are able to quickly access the accounts by making

Assets	Liabilities
Securities	XXX	checkable deposits $1
Reserves	XXX
Bonds $ 1 m

Checkable deposit is a liability of the bank - towards deposit holders.

Central Bank has a responsibility to maintain the cash Credit creation facility for other commercial Banks.

Here, Central Bouk has some reserves. If the Central bank wants to increase its reserves, then central bank is required to land the fund to other banks like-commercial Bank because Commercial Bank has to maintain their CRR, SLR, else with the central Bank.