(5) Bank Reserves — Accounting

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Note, the below, rather than being snapshots of a balance sheet, are T-accounts recording only changes to the balance sheet.

Once again the balance sheet of the Federal Reserve provides a simple starting point. The Treasury holds an account (called Treasury’ General Account, TGA) at the Fed, which is part of L3.

When Treasury spends, the Fed debits the TGA and credits the reserve balances of banks. Simultaneously, private bank credits the account of private economic units. Say the Treasury buys $100 worth of paper from a paper company.

If Treasury receives $25 of income tax payments, the following happens:

Therefore, in case of a deficit (taxes less than expenses), there is a net injection of reserves. The consolidation of the two previous fiscal operations is:

 The source.