Use the following to answer questions .
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) 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 drawn against Jekyll Bank for the $50,000 payment to the Fed, Jekyll Bank's reserves will decrease by $50,000. This is because the check will be cleared through the banking system, which will ultimately result in the Fed deducting $50,000 from Jekyll Bank's reserves.

Use the Following to Answer Questions