Question

Suppose Tiara withdraws $1,000 of cash from Bank of America and Brandon deposits $500 in cash at Bank of America at the same time. Which of the following is true?

  

The bank’s reserves will stay the same.

   

The bank’s liabilities will increase by $500.

   

The bank reserves will fall by $500.

   

The bank’s reserves will increase by $500.

Answer 1

option 3

The bank reserves will fall by $500.

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When a withdrawal made in a bank

the amount deducted from deposits and reserves immediately

so the reserves decrease by 1000 and the deposit decreases by 1000

When a deposit made in a bank

the deposit amount increases and also the reserve amount increases immediately by the same amount

so the reserve increases 500 and the deposit increases by 500

in total reserves decreases by 500 and deposit decreases by 500

Deposit is a liability so liability decreases by 500