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Exhibit: Fed Sells Bonds
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.
-(Exhibit: Fed Sells Bonds) 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.

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When Henry Hyde writes a check for $50,000, Jekyll Bank's checkable deposits decrease by $50,000, and its reserves also decrease by $50,000, as the bank must transfer the full amount to the Fed.

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