Question

If the Fed lends five banks a total of$\backslash (100$million but depositors withdraw $\backslash )50$million and hold it as currency, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

Short answer

The Banking System just gains $\$50$million for possible later use notwithstanding the $\$100$million credit since investors have removed $\$50$million from the Banking System.

The monetary base increments by $\$100$
million on the grounds that the monetary liabilities of the Fed have expanded by this sum.

Step-by-step solution

Concept introduction

A bank is a monetary organization that accepts deposits from people in general and give interest in return while at the same time extending loans to lenders.

Step 2: 

Assume the Fed loans a sum of $\$100$million to five banks, however contributors pull out $\$50$million and hold it as money. The accounting report of the financial framework and the Federal Reserve System changes as follows:

Banking system
Assets	Liabilities
Reserves localid="1656101600508" role="math" $+100$million	Loans localid="1656101627614" $+100$ million
	Checkable deposits$-\$50$ million

Federal Reserve System
Assets	Liabilities
Loans$+\$100$ million	Reserves$+\$100$ million

The Banking System just gains $\$50$million for possible later use not with standing the $\$100$million credit since investors have removed $\$50$million from the Banking System.

The monetary base increments by $\$100$million on the grounds that the monetary liabilities of the Fed have expanded by this sum.

Final answer

The Banking System just gains $\$50$million for possible later use notwithstanding the $\$100$million credit since investors have removed $\$50$million from the Banking System.

The monetary base increments by $\$100$million on the grounds that the monetary liabilities of the Fed have expanded by this sum.