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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) As a result of the open market sale, Jekyll Bank
A) can create $50,000 of new loans.
B) will have $45,000 of excess reserves.
C) will have to borrow reserves to replenish its reserve deficiency.
D) will have an increase in checkable deposits.

Question

Quizplus · Accepted Answer

When the Fed sells a bond, it reduces the reserves in the banking system. Jekyll Bank's reserves decrease by $50,000, creating a reserve deficiency that it needs to address, possibly by borrowing reserves.

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