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Chapter 15: Q.5 (page 410)

If a bank sells \(10 million of bonds to the Fed to pay back \)10million on the loan it owes, what is the effect on the level of checkable deposits?

Short Answer

Expert verified

The checkable deposits remain unchanged.

Step by step solution

01

Concept Introduction

Checkable deposit is a specialized term for any demand deposit account against which checks or drafts of any sort might be composed.

02

Explanation

None. The decrease of $10million in discount loans and increment of $10million of bonds held by the Fed leaves the degree of reserves unaltered so checkable deposits to remain unaltered.

03

Final Answer

The reduction in discount loans and increase in bonds leaves the checkable deposit unchanged.

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Most popular questions from this chapter

Suppose the Fed buys $1million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?

鈥淭he money multiplier is necessarily greater than 1.鈥� Is this statement true, false, or uncertain? Explain your answer

During the Great Depression years from 1930 to 1933, both the currency ratio c and the excess reserves ratio e rose dramatically. What effect did these factors have on the money multiplier?

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?

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.
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