Assume the Treasury borrows $5 billion from the non-bank public and spends it. The effect on bank reserves is that they will __________ by $5 billion when the Treasury borrows and then bank reserves will __________ by $5 billion when the Treasury spends the money.
A) rise; fall
B) fall; rise
C) rise; rise
D) fall; fall

Question

Quizplus · Accepted Answer

When the Treasury borrows $5 billion from the non-bank public, bank reserves will decrease by $5 billion as the funds move out of bank accounts into Treasury accounts. When the Treasury spends the borrowed money, the funds will flow back into the banking system and increase bank reserves by $5 billion. Therefore, bank reserves will initially fall and then rise by $5 billion.

Assume the Treasury Borrows $5 Billion from the Non-Bank Public