If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes, what will be the effect on the level of checkable deposits? Assume that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change.

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Esteban Dennis

19 February, 20:16

If a bank sells $10 million of bonds to the Fed to pay back $10 million on the loan it owes, what will be the effect on the level of checkable deposits? Assume that the required reserve ratio on checkable deposits is 10%, banks do not hold any excess reserves, and the public's holdings of currency do not change.

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Stevenson · Answer 1

There will be no effect on the level of checkable deposits.

Explanation:

Since the bank sold the $10 million of bonds to pay back a debt, that means that the bank's checkable deposits will not change. The bank's reserves will remain unchanged since the checkable deposits remain unchanged.