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. To collect the $50,000 payment made by Henry, the Fed
A) adds $50,000 to Jekyll Bank's reserves by $50,000.
B) subtracts $50,000 from Jekyll Bank's reserves.
C) accepts the cash from Jekyll Bank which acts on behalf of Henry Hyde.
D) collects $5,000 (the required reserve portion) from Jekyll Bank.

Question

Quizplus · Accepted Answer

When Henry Hyde writes a check against Jekyll Bank to pay for the bond, the bank's reserves decrease by the amount of the check, which in this case is $50,000. Therefore, the Fed subtracts $50,000 from Jekyll Bank's reserves.

Scenario 2: Fed Sells Bonds to Henry Hyde