Question

If a local bank decides to convert some of its U.S. Treasury securities into cash, which it will hold in its vault, reserves will ________, liabilities will ________, and owner’s equity will ________. Choose one:
A. decrease; stay the same; decrease

B. increase; stay the same; stay the same

C. stay the same; increase; decrease

D. decrease; decrease; decrease

E. increase; stay the same; decrease

Answer 1

Answer:

B. increase; stay the same; stay the same

Explanation:

Bank reserves are compulsory deposits by the banks that they are required to not loan out( they are kept in the vault). Therefore, when a local bank decides to convert some of its U.S. Treasury securities into cash, this is an increase in assets. Since the cash is held in its vault, reserves will increase, liabilities will not be affected and owner’s equity will also not be affected. Therefore, the correct answer is B.