Question

A bank will often hold government securities as an asset. If a bank were to sell $100,000 in government securities to an individual who paid for the bond in cash and the bank placed this cash in their vault, by how much would the money supply change as a result?

It would decrease by $100,000. T/F

Answer 1

True

Step-by-step explanation:

The money that banks keep in their vaults are not part of the money supply. Technically the money supply = currency in circulation plus demand deposits.

Money held by bank vaults is considered part of the monetary base, which is a broader term than money supply. Actually, the money supply is part of the monetary base. Monetary base = money supply + money kept by banks as reserves (includes money in vaults)