Tom decides to withdraw $300 out of his checking account. The impact of this transaction on the Fed's balance sheet will be:

Question

Quizplus · Accepted Answer

When Tom withdraws $300 from his checking account, the bank's reserves decrease by $300, which means that the Fed's liability of reserves decreases by $300. At the same time, there is an increase in the liability of currency by $300 since currency in circulation has increased. This transaction does not affect the total assets or total liabilities of the Fed, but it does change the composition of the liabilities, as explained above in choice A. Therefore, the correct answer is A.

Tom Decides to Withdraw $300 Out of His Checking Account