Consider a bank that has $10 million as reserves, $5million as securities, and $100 million as transaction accounts.If a customer, who is a government securities dealer, sells $2 million in securities to the Fed
A)the bank's transaction accounts reduce to $98 million.
B)the bank's securities reduce by $4 million.
C)the bank's reserves increase to $12 million.
D)the bank's loans reduce by $2 million.

Question

Quizplus · Accepted Answer

When the Fed buys securities from a government securities dealer, the payment for these securities increases the reserves of the dealer's bank. Therefore, if the bank's customer sells $2 million in securities to the Fed, the bank's reserves increase by $2 million, from $10 million to $12 million.

Consider a Bank That Has $10 Million as Reserves, $5million