<p>No. </p>

<p>Think of it as the central bank is buying the bond <em>from the commercial bank itself,</em> so that the bank was holding one type of asset (a bond) and now it's holding another type of asset(cash or its equivalent, reserves at the central bank). At that point deposits have not increased, it's just, that the bank now is holding more cash and less bonds than before. Because cash holdings or reserves at the central bank are called 'reserves', the commercial bank's reserves have increased. </p>

<p>The next step is that this bank sees no benefit in holding so much cash, more than the regulation forces it to, so ti goes and lends this cash out. At that point deposits start increasing, but still, the whole of the banking system is going to have more reserves than before because somebody is going to be holding that cash.</p>

CC BY-SA 3.0
2016-03-31T18:00:59.840Z
2016-03-31T18:00:59.840Z
Fix.B.
<p>The question is poorly worded as currency can form a component of reserves.   </p>

<p>But that aside...the example is essentially correct.  Not mentioned (and this is confusing) is that there are paper shekel's (currency) and electronic shekel's.  When that central bank created 100 shekels, it created 100 electronic shekels.  Put another way it granted the bond seller's bank a deposit at the central bank worth 100 shekels.  </p>

<p>So what constitutes reserves?  It is all paper money deposited at a bank + all deposits the bank has with the central bank.  All central bank deposits (or electronic shekels) are automatically counted as reserves, which is why the instant the central bank fabricated their electronic shekel, aggregate reserves increased by 100.  Naturally banks don't keep all reserves on deposit and gamble away a certain percentage (the multiplier) which leads to the answer.</p>

CC BY-SA 3.0
2015-12-02T08:25:54.787Z
This answer would be greatly improved if you used neutral words instead of "fabricated" and "gamble".
Giskard
CC BY-SA 3.0
2015-12-02T02:06:51.080Z
2015-12-02T02:06:51.080Z
user2662680
<p>In the example, the reserve-deposit ratio is assumed to stay fixed, which is rather unrealistic assumption. It's much more realistic to assume that the supply changes by 100, and the reserve-deposit ratio changes to accommodate that. </p>

<p>It's correct, although the wording should make it more clear that the ratio does not change as a result of the operation.</p>

CC BY-SA 3.0
2016-01-01T14:58:41.803Z
2016-01-01T14:58:41.803Z
Dole
<p><a href="https://i.sstatic.net/VyK93.jpg" rel="nofollow noreferrer"><img src="https://i.sstatic.net/VyK93.jpg" alt=""></a></p>

<p>When the central bank pays 100 shekels for a bond held by the public, it is assumed that the 100 shekels are deposited. In this case, shouldn't it cause a 100 shekels increase in the bank deposit rather than in the bank reserve? </p>

CC BY-SA 3.0
2015-11-23T02:28:20.737Z
Bank reserves are bank deposits. Reserves are just a fraction of deposits that a bank holds.
DornerA
<central-banking>
Is an increase in the money supply (by buying government bonds) recorded in bank deposits or bank reserves?
OinkOink
# Is an increase in the money supply (by buying government bonds) recorded in bank deposits or bank reserves?

(Asked by: username_0 on 2015-11-23)

[![](https://i.sstatic.net/VyK93.jpg)](https://i.sstatic.net/VyK93.jpg)

When the central bank pays 100 shekels for a bond held by the public, it is assumed that the 100 shekels are deposited. In this case, shouldn't it cause a 100 shekels increase in the bank deposit rather than in the bank reserve?

**Tags:** central-banking

> **Comments:**
> **username_1**: Bank reserves are bank deposits. Reserves are just a fraction of deposits that a bank holds.  

---

## 3 answers

### Answer by username_2 on 2016-03-31. Score: 1

No.

Think of it as the central bank is buying the bond *from the commercial bank itself,* so that the bank was holding one type of asset (a bond) and now it's holding another type of asset(cash or its equivalent, reserves at the central bank). At that point deposits have not increased, it's just, that the bank now is holding more cash and less bonds than before. Because cash holdings or reserves at the central bank are called 'reserves', the commercial bank's reserves have increased.

The next step is that this bank sees no benefit in holding so much cash, more than the regulation forces it to, so ti goes and lends this cash out. At that point deposits start increasing, but still, the whole of the banking system is going to have more reserves than before because somebody is going to be holding that cash.


---

### Answer by username_5 on 2016-01-01. Score: 0

In the example, the reserve-deposit ratio is assumed to stay fixed, which is rather unrealistic assumption. It's much more realistic to assume that the supply changes by 100, and the reserve-deposit ratio changes to accommodate that.

It's correct, although the wording should make it more clear that the ratio does not change as a result of the operation.


---

### Answer by username_3 on 2015-12-02. Score: -1

The question is poorly worded as currency can form a component of reserves.

But that aside...the example is essentially correct. Not mentioned (and this is confusing) is that there are paper shekel's (currency) and electronic shekel's. When that central bank created 100 shekels, it created 100 electronic shekels. Put another way it granted the bond seller's bank a deposit at the central bank worth 100 shekels.

So what constitutes reserves? It is all paper money deposited at a bank + all deposits the bank has with the central bank. All central bank deposits (or electronic shekels) are automatically counted as reserves, which is why the instant the central bank fabricated their electronic shekel, aggregate reserves increased by 100. Naturally banks don't keep all reserves on deposit and gamble away a certain percentage (the multiplier) which leads to the answer.

> **Comments:**
> **username_4**: This answer would be greatly improved if you used neutral words instead of "fabricated" and "gamble".  

---

