Assume that the required reserve ratio on checkable deposits is 10%, banks do no

Question

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. If the Fed reduces reserves by selling $5 million worth of bonds to the banks, what will the T-account of the banking system look like when the banking system is in equilibrium? What will have happened to the level of checkable deposits?

A Checkable deposits fall by $50 million and the T-account is:

B. Checkable deposits fall by $50 million and the T-account is:

C. Checkable deposits fall by $5 million and the T-account is:

D Checkable deposits fall by $5 million and the T-account is:

Explanation / Answer

Checkable deposits fall by $50 million and the T-account is: Banking System Assets Liabilities Reserves minus$5 million Checkable deposits minus$50 million Securities plus+$5 million Loans minus$50 million

5million/10%=50 millions

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