Question

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.

Answer 1

Answer:

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.