A bank will often hold government securities as an asset.If a bank were to sell $100,000 in government securities to an individual who paid for the bond in cash and the bank placed this cash in its vault,by how much would the money supply change as a result?

Question

Quizplus · Accepted Answer

When the bank sells the government securities, it receives cash in exchange. This decreases the bank's assets (government securities) by $100,000 and increases its reserves (cash) by $100,000. However, since this cash is being held in the bank's vault, it does not get loaned out and does not count towards the money supply. Therefore, the overall effect is a decrease in the money supply by $100,000.

A Bank Will Often Hold Government Securities as an Asset