Question

If the fed lends five banks an additional total of​ $100 million but depositors withdraw​ $50 million and hold it as​ currency, what happens to reserves and the monetary​ base? use​ t-accounts to explain your answer.

Answer 1

The five banks' reserves will increase by $50 million, while the monetary base will increase by $100 million ($50 million in banks and $50 million out with the clients)

Step-by-step explanation:

The five banks:

assets liabilities

reserves +$100 million Fed's loan +$100 million

reserves -$50 million clients' deposits -$50 million

net effect

reserves +$50 million Fed's loan +$100 million

clients' deposits -$50 million

The Fed :

assets liabilities

loans to 5 banks reserves in banks +$50 million

+$100 million

currency +$50 million

net effect

loans +$100 million reserves +$50 million

currency +$50 million