If the fed lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? use t-accounts to explain your answer.

Question

Birdy

Business

28 July, 17:41

If the fed lends five banks an additional total of $100 million but depositors withdraw $50 million and hold it as currency, what happens to reserves and the monetary base? use t-accounts to explain your answer.

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Answers (1)

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Alyssa Cobb · Answer 1

The five banks' reserves will increase by $50 million, while the monetary base will increase by $100 million ($50 million in banks and $50 million out with the clients)

Explanation:

The five banks:

assets liabilities

reserves + $100 million Fed's loan + $100 million

reserves - $50 million clients' deposits - $50 million

net effect

reserves + $50 million Fed's loan + $100 million

clients' deposits - $50 million

The Fed:

assets liabilities

loans to 5 banks reserves in banks + $50 million

+$100 million

currency + $50 million

net effect

loans + $100 million reserves + $50 million

currency + $50 million