Question

If the Fed sells $\$2$million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

Short answer

First National Bank
Assets	Liabilities
Reserves=$-\$2$ million	-
Securities=$+\$2$ million	-

Federal Reserve
Assets	Liabilities
Securities= $-\$2$million	Reserves= $-\$2$million

Step-by-step solution

Concept introduction

Monetary base alludes stringently to exceptionally fluid assets including notes, money, and current bank stores. At the point when the Federal Reserve makes new assets to buy bonds from business banks, the banks see an expansion in their save possessions, which makes the monetary base grow.

First National Bank pays for the bonds 

Assuming the First National Bank pays for the bonds out of stores, there will be a $\$2$million lessening available for later and a$\$2$million expansion in protections at First National Bank. While at the Fed, there is a downfall of $\$2$million for possible later use (liabilities) and a $\$2$million decrease in protections (resources).

The decay of $\$2$million available for later implies that the monetary base fell by $\$2$million.

Step 3: 

The following $T$- accounts describe the results.

First National Bank
Assets	Liabilities
Reserves=$-\$2$million	-
Securities=$+\$2$million	-

Federal Reserve
Assets	Liabilities
Securities=$-\$2$ million	Reserves=$-\$2$ million

Final answer

The following T - accounts describe the results.

First National Bank
Assets	Liabilities
Reserves= $-\$2$million	-
Securities= $+\$2$million	-

Federal Reserve
Assets	Liabilities
Securities= -$2 million	Reserves= -$2 million