For the following questions assume the following facts:
(1)Balance of Payments = 0 prior to the transactions.
(2)Person A (who lives in the United States) purchases an airplane from British Airways for $150,000.
(3)Person A pays with a check from his account at First Union Bank in the United States.
(4)British airways, since it will need dollars in 1 month, deposits the check at the Bank of England.
(5)Bank of England deposits the $150,000 at Commonwealth bank, which is located in the United States.
Due to the transactions above, what are the effects on the reserve at the Fed?

Question

Quizplus · Accepted Answer

The correct answer is B because when Person A pays with a check from his account at First Union Bank (fact 3), the reserves at the Fed decrease by $150,000 as the money moves out of the U.S. banking system. However, when the Bank of England deposits the $150,000 at Commonwealth Bank in the U.S. (fact 5), the reserves at the Fed increase by $150,000 as the money moves back into the U.S. banking system. The net effect on the reserve at the Fed is therefore 0.

For the Following Questions Assume the Following Facts