Suppose banks keep no excess reserves and that all banks are currently meeting the reserve requirement. The Federal Reserve then makes an open market purchase of $16,000 from Bank 1. Use the T-account to determine the impact of this transaction on Bank 1's reserves and the banking system's reserves. What will be the change in Bank 1's reserves and the banking system's reserves?
1) Bank 1's reserves will increase by $16,000 and the banking system's reserves will increase by $16,000.
2) Bank 1's reserves will increase by $16,000 and the banking system's reserves will decrease by $16,000.
3) Bank 1's reserves will decrease by $16,000 and the banking system's reserves will increase by $16,000.
4) Bank 1's reserves will decrease by $16,000 and the banking system's reserves will decrease by $16,000.