Suppose the Fed purchases $1,000 of government securities from the general public who then deposit the proceeds into their checking accounts in commercial banks. Which pair of the T-accounts below shows this transaction?

Question

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The Fed's purchase of government securities increases the reserves of the commercial banks. This transaction would increase the assets of the commercial banks, specifically their reserves held at the Fed. At the same time, the liabilities of the commercial banks would increase due to the increase in the checking account balances of the general public.

In the T-account for the Fed, we can see that their securities holdings decrease by $1,000, which is the amount of government securities they purchased. We also see that reserves increase by $1,000, which is the amount by which the assets of commercial banks increase due to the purchase of these securities.

In the T-account for the commercial banks, we see that reserves increase by $1,000, as noted above. We also see that deposits increase by $1,000, which reflects the fact that the general public deposited the proceeds from the sale of the securities into their checking accounts.

Of the four choices given, only choice B correctly reflects this transaction, showing the appropriate increases in both reserves and deposits in the T-account for the commercial banks.

Suppose the Fed Purchases $1,000 of Government Securities from the General