Question

Suppose that the customer of a bank writes a cheque payable to a tennis club who...

Suppose that the customer of a bank writes a cheque payable to a tennis club who deposits the cheque at the same bank. Which of the following is correct?
The bank's loans to customers would increase and demand deposits would decrease.
The bank's reserves would increase but its demand deposits would decrease.
The bank's reserves would decrease but its demand deposits would increase.
The bank's loans to customers would decrease and reserves would increase.
The bank's reserves and demand deposits would not change.
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Answer #1

Reserves - Commercial banks' holdings in accounts with a Central Bank. These are currency reserves that are not lent out as customer loans.

The bank's reserves and demand deposits would not change if the cheque is deposited into an account at the same bank.

Else, the demand deposits decrease.

Demand deposits - Categorized as M1 in the money supply. These form a major share of the money supply in a country. It is an account with a financial institution, or, bank, an important aspect being that the money can be withdrawn without a notice to the bank.

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