Question

If the Fed sells​ $2 million of bonds to the First National​ Bank, what happens to reserves and the monetary​ base?

Answer 1

Answer:

Reserves fall by $2 million, and the monetary base falls by $2 million.

Explanation:

In the books of First National​ Bank, the purchase of $2 million of bonds by First National​ Bank, from the Federal Reserve means there is a reserve with the Federal Reserve represented by security which stands as asset.

In the books of the Federal Reserve, The sales of bonds to First National​ Bank will create a liability from the reserve assets.

See attached for the T-accounts explain the answer    

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