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Impact of Fed Bond Sales on Reserves

Selling $2 million in bonds by the Federal Reserve to the First National Bank decreases the bank's reserves by $2 million and increases its securities by the same amount. For the Federal Reserve, reserves and securities both decrease by $2 million. Overall, this leads to a $2 million decrease in the monetary base as reserves in the banking system have declined by $2 million.

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47 views1 page

Impact of Fed Bond Sales on Reserves

Selling $2 million in bonds by the Federal Reserve to the First National Bank decreases the bank's reserves by $2 million and increases its securities by the same amount. For the Federal Reserve, reserves and securities both decrease by $2 million. Overall, this leads to a $2 million decrease in the monetary base as reserves in the banking system have declined by $2 million.

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Rosenna99
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© © All Rights Reserved
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CHAPTER 14: THE MONEY SUPPLY PROCESS

Q1. If the Fed sells $2 million of bonds to the First National Bank, what
happens to reserves and the monetary base? Use T-accounts to explain your
answer.

First National Bank


Assets Liabilities
Securities/Bonds +$2M Reserves
Reserves -$2M

For the First nation bank there will be a decrease in reserves by $2 million and an
increase in securities by the same amount.

Federal Reserve System


Assets Liabilities
Securities/Bond -$2M Reserves -$2M
s

For the Federal Reserve System, there will be a decrease in the Reserves and a
decrease in Govt. Securities by $2 million
Selling of bonds by the Fed to the First National Bank leads to a decrease in the
monetary base by $2 million because the level of reserves has fallen by $2 million.

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