Scenario 2: Fed sells bonds to Henry Hyde
Consider a banking system in which the reserve requirement is 10%, banks try not to hold excess reserves, consumers and firms hold money only in the form of checking account balances, and all loan proceeds are spent. Suppose initially all banks in the system are loaned up. Now, suppose that the Fed sells a $50,000 bond to Henry Hyde, who pays for the bond by writing a check drawn against Jekyll Bank.
-Refer to Scenario 2. Which of the following happens when Henry Hyde pays for the bond by writing a check from his checking account at the Jekyll Bank?
A) Jekyll Bank's checkable deposits decreases by $50,000 and its reserves decreases by $45,000.
B) Jekyll Bank's checkable deposits decreases by $45,000 and its reserves decreases by $50,000.
C) Jekyll Bank's checkable deposits and reserves decrease by $50,000 each.
D) Jekyll Bank's checkable deposits and reserves increase by $45,000 each.

Question

Quizplus · Accepted Answer

When Henry Hyde writes a check for $50,000 to buy the bond, Jekyll Bank's checkable deposits decrease by $50,000, and its reserves also decrease by $50,000 as the funds are transferred to the Fed.

Scenario 2: Fed Sells Bonds to Henry Hyde