Question

Suppose, while cleaning out its closets, a worker at the federal reserve bank of atlanta discovers a painting of elvis (medium oil on velvet) that used to grace the walls of the conference room. suppose further that, at a public auction, the bank sells the painting for $24.95. this sale will cause ____in the monetary base, everything else held constant.

a. an increase of $24.95
b. an increase of more than $24.95
c. a decrease of $24.95
d. a decrease of more than $24.95

Answer 1

The sale of a painting by the Federal Reserve Bank of Atlanta for $24.95 will cause a decrease of $24.95 in the monetary base, reflecting a reduction in its assets.

Step-by-step explanation:

When the Federal Reserve Bank of Atlanta sells a painting for $24.95, it will cause a decrease of $24.95 in the monetary base, everything else held constant. Since the Federal Reserve is effectively exchanging a non-monetary asset for cash, this transaction would result in a decrease in its assets and thus a reduction in the monetary base by an equal amount.

When the Federal Reserve Bank of Atlanta sells the painting, the money from the sale will be taken out of the bank's reserves. The reserves are part of the monetary base, which consists of currency in circulation and reserve balances held by banks. Therefore, the sale of the painting will lead to a decrease in the reserves, and hence a decrease in the monetary base, of more than $24.95.