Suppose a student writes a check in the amount of $300 to the college bookstore for textbooks. Discuss briefly the impact on the student's balance sheet, his/her bank's balance sheet and the balance sheet of the Fed.
What will be an ideal response?
For the check writer, the balance sheet does not change in size and liabilities do not change at all. All that changes is the composition of assets. The student has an increase in the asset called textbooks for $300 and an equal decrease in the asset of bank deposits. For the student's bank, its liabilities customer deposits decrease by $300 but so will the asset of reserves decrease by the same amount. For the Fed, the transaction will not impact the size of its balance sheet since the reduction in the reserves of one bank will be offset by an increase in reserves of another once the check is processed.
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