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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

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.

If the Fed sells 1 million of bonds and banks reduce their borrowings from the Fed by million, predict what will happen to the money supply.

Describe how each of the following can affect the money supply:

(a) The central bank

(b) banks

(c) depositors.

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.

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