Suppose that the Federal Reserve (the "Fed") sells $1.5 million of bonds to a bond dealer, who pays the Fed by writing a check against the funds in her checking account. What is the initial impact of this transaction?

A. Checkable deposits fall by $105 million, and the banking system's total reserves fall by $1.5 million.

B. The banking system? s holdings of securities fall by $1.5 million, and the banking system's total reserves rise by $1.5 million.

C. Checkable deposits fall by $1.5 million, and the banking system's holdings of securities fall by $1.5 million.

D. The banking system's holdings of securities rise by $1.5 million, and the banking system's total reserves fall by $1.5 million.

Question

Business

Emily Welch

17 October, 16:09

Suppose that the Federal Reserve (the "Fed") sells $1.5 million of bonds to a bond dealer, who pays the Fed by writing a check against the funds in her checking account. What is the initial impact of this transaction?

A. Checkable deposits fall by $105 million, and the banking system's total reserves fall by $1.5 million.

B. The banking system? s holdings of securities fall by $1.5 million, and the banking system's total reserves rise by $1.5 million.

C. Checkable deposits fall by $1.5 million, and the banking system's holdings of securities fall by $1.5 million.

D. The banking system's holdings of securities rise by $1.5 million, and the banking system's total reserves fall by $1.5 million.

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Answers (1)

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Morgan Bray · Answer 1

C. Checkable deposits fall by $1.5 million, and the banking system's holdings of securities fall by $1.5 million.

Explanation:

Checkable deposits are a category of Custer deposit that allows a customer withdraw the amount in their accounts on demand.

Of the federal reserve sells $1.5 million worth of bonds and gets paid through a checking account, then the balance in the checking account will go down by $1.5 million.

Since the Federal reserve (central bank of the United States) is part of the banking system and they are giving out bonds, the banking system's holdings of securities fall by $1.5 million.