If a bank sells 10 million of bonds to the Fed to pay back 10 million on the loan it owes, wha

step 1 Here we're going to continue taking a look at the money supply and the process of it. And we're

If a bank sells 10 million of bonds to the Fed to pay back ...

Labs

Want to see this concept in action?

NEW

Explore this concept interactively to see how it behaves as you change inputs.

View Labs

Key Concepts

Open Market Operations

Open market operations are tools used by a central bank to control the money supply by buying or selling securities. When the Fed sells bonds, it is withdrawing liquidity from the banking system, which can put downward pressure on the money supply if not offset by other transactions.

Bank Reserves

Bank reserves are funds that banks hold in their accounts at the central bank and serve as the basis for their ability to create loans and checkable deposits. Transactions that alter a bank’s reserves, such as selling bonds to obtain funds and then using those funds to repay loans, can affect the level of reserves without necessarily changing the overall amount of checkable deposits.

Money Supply and Checkable Deposits

Checkable deposits are a major component of the money supply and are closely linked to the level of bank reserves. In transactions where the increase in reserves from selling bonds is exactly offset by a repayment that reduces those same reserves, the net effect on checkable deposits is neutral, leaving the overall money supply unchanged.

Transcript

Please give Ace some feedback