Final answer:
When the seller of bonds to the Federal Reserve keeps the proceeds in currency, it increases the monetary base and reserves. It can also potentially lead to an increase in deposit expansion.
Step-by-step explanation:
When the seller of bonds to the Federal Reserve keeps the proceeds in currency, it means that they are not depositing the funds into a bank. Therefore, the effect on the monetary base would be an increase. The seller is holding onto physical currency, which increases the amount of money in circulation.
Reserves are the funds held by banks at the Federal Reserve. When the seller keeps the proceeds in currency, the reserves of banks will increase. This is because the currency held by the seller is not deposited into the banking system, so banks have more funds to hold as reserves.
Deposit expansion is the process by which banks create new money through lending. When the seller of bonds keeps the proceeds in currency, it does not directly impact deposit expansion. However, the increase in reserves for banks resulting from the seller keeping the proceeds in currency can potentially support more lending, leading to an increase in deposit expansion.
The correct answer is: Increased in the monetary base; increase in reserves; increase in deposit expansion (A).