You are required to hold 10 percentof checkable deposits as reserves. If you were faced with unexpected withdrawals of $30 million from time deposits, would you rather Option a: Draw down $10 million excess reserves and borrow $20 million from the Fed? Option b: Draw down $10 million excess reserves and sell securities of $20 million?

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Jennifer Estes

23 March, 00:00

You are required to hold 10 percentof checkable deposits as reserves. If you were faced with unexpected withdrawals of $30 million from time deposits, would you rather Option a: Draw down $10 million excess reserves and borrow $20 million from the Fed? Option b: Draw down $10 million excess reserves and sell securities of $20 million?

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Noelle · Answer 1

Option a: Draw down $10 million excess reserves and borrow $20 million from the Fed?

Explanation:

I would choose option A because it is cheaper, since the Fed will always charge a lower rate than any bond issuance. Even if you compare it to the cost of issuing new stocks, the equity holders will also demand a higher return (higher cost of equity) than the Fed.

Option B is more expensive and will reduce the equity of current shareholders more.