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 the Elvis painting will cause a decrease of $24.95 in the monetary base.

Step-by-step explanation:

The sale of the Elvis painting by the Federal Reserve Bank of Atlanta for $24.95 will cause a decrease of $24.95 in the monetary base.

When the bank sells the painting, it receives $24.95 in cash. This cash is considered part of the monetary base, which is the total amount of currency in circulation plus reserves that banks hold with the central bank. Therefore, selling the painting reduces the monetary base by the same amount as the sale price.