Question

If a bank sells​ $10 million of bonds to the Fed to pay back​ $10 million on the loan it​ owes, what will be the effect on the level of checkable​ deposits? 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.

Answer 1

Answer:

There will be no effect on the level of checkable deposits.

Explanation:

Since the bank sold the $10 million of bonds to pay back a debt, that means that the bank's checkable deposits will not change. The bank's reserves will remain unchanged since the checkable deposits remain unchanged.