Question

3. Utilizing T-accounts for all relevant actors, answer the following questions,

a. If the FED buys a $10,000 treasury bill from Carlos Slim and he deposits the money in his bank, what happens to reserves and the monetary base?

b. If instead Carlos Slim deposits $5,000 in his bank and cashes in the remaining $5,000, what happens to reserves and the monetary base?

Answer 1

a) If the FED buys a $10,000 treasury bill from Carlos Slim and he deposits the money in his bank then

Carlos Slim T-account

Assets	Liabilities
Securities -($10000)
checkable deposits $10000

Bank T-account

Assets	Liabilities
Reserves $10000	checkable deposits $10000

FED T-account

Assets	Liabilities
Securities $10000	Reserves $10000

Monetary Base= reserves + currency

If a person deposit whole amount in bank then reserves are inreases by $10000 and it cause Monetary Base to increase as well by the same amount.

b)  If instead Carlos Slim deposits $5,000 in his bank and cashes in the remaining $5,000 then

Carlos Slim T-account

Assets	Liabilities
Securities -($10000)
checkable deposits $5000
currency $5000

Bank T-account

Assets	Liabilities
Reserves $5000	checkable deposits $5000

FED T-account

Assets	Liabilities
Securities $10000	Reserves $5000
	currency $5000

If a person deposit whole amount in bank then reserves are inreases by $5000 and currency is also increases by $5000 and it cause Monetary Base to increase as well by the amount $10000.