Question

You receive a $1,000 gift from your grandmother when you graduate from college. Your grandmother withdrew the $1,000 from her checking account and gave you ten $100 bills. You deposit the ten bills into your checking account. Discuss the impact of these transactions on your grandmother's balance sheet, your balance sheet, and the Fed's balance sheet.

Answer 1

Impact on grandmother's balance sheet:

When your grandmother withdrew the $1,000 from her checking account, in the asset side of her balance sheet, her deposits decreases by $1,000 and currency increases by $1,000. Thus, there is no change in assets, only the composition of currency and deposits changes.

Impact on your balance sheet:

When she presents the gift to you, her assets (i.e., currency) will decrease by $1,000, whereas your asset of currency will increase by $1,000. When you deposit $1,000 in the bank, the composition of your assets changes from currency to deposits (i.e., currecny decreases and deposits increases).

Impact on Fed's balance sheet:

When your grandmother withdraws $1,000, in the Fed's balance sheet the reserves decreased by $1,000 and the currency increased by $1,000. When you deposit $1,000 in the bank, the liability of currency will decrease by $1,000 and the liability of reserves will increase by $1,000.