The Fed sells a U.S. government security and a bank dealer writes a check for the amount. When the check clears
A. reserves increase by the amount of the check because the Fed clears the check by increasing the amount of the bank's deposits with the Fed.
B. reserves remain unchanged because the decrease of reserves at the dealer's bank is offset by an increase in the reserves at the Fed.
C. reserves have fallen by the amount of the reserves times the reserve ratio, and the money supply falls by the difference between the amount of the check and the fall in the reserves.
D. reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed.
Answer: D
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