The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits
A) of commercial banks are unchanged, but their reserves increase.
B) and reserves of commercial banks both decrease.
C) of commercial banks are unchanged, but their reserves decrease.
D) and reserves of commercial banks are both unchanged.

Question

Quizplus · Accepted Answer

When commercial banks borrow from the Federal Reserve Banks, their reserves increase. However, their checkable deposits remain unchanged. This is because checkable deposits represent liabilities of the commercial bank to its customers, whereas reserves represent assets that the commercial bank holds with the Federal Reserve Banks.

The Commercial Banking System Borrows from the Federal Reserve Banks