When an individual writes a check to pay back a bank loan,

both money and legal reserves decline in the banking system.
the amount of money declines, but legal reserves in the banking system do not
the amount of legal reserves in the banking system declines, but the amount of money does not.
neither money nor legal reserves changes.

The two largest liabilities of Federal Reserve Banks are:

U.S. government securities and member bank reserves.
Federal Reserve notes and member bank reserves.
Treasury deposits and Federal Reserve notes.
Treasury deposits and U.S. government securities.

 Back to Reading Overview Next Page