Question

Explain how the following transactions affect the money supply: (a) Bank A receives a check deposited to it, drawn on another bank in the system; (b) Bank A receives an increase in its reserve account with the Fed, resulting from its sale of a bond to the Fed; (c) the Treasury sells a new bond (issues new debt) to the Fed; (d) the Treasury sells a new bond (issues new debt) to a foreign central bank; and (e) Mr. Skywalker finds $1,000 in paper currency buried in his backyard and deposits it in his checking account.

Answer 1

A.
It will increase the money supply because check drawn at the another bank took place due to loan issued by the another bank. It increased the money supply in bank A after maintaining the required reserve with another bank.
B.
No any new money supply is created as the one asset (treasury bond) is converted into the reserve. Besides, no any loan is issued to anybody by this transaction.
C.
It decreases the money supply because treasury sucks money from the public by issuing new debt.
D.
It increases the money supply as funds received from the foreign central banks will be issued in the economy.
E.
It does not change the money supply as the sum of M1 money supply does not change. A cash in circulation is deposited in the bank.