Question

Follow a $1 billion purchase of U.S. Treasury bonds by the Fed from commercial banks. Discuss the changes that occur to the balance sheet of the banking system and the balance sheet of the Fed.

Answer 1

With $1 billion purchase of US treasury bonds by the Fed from commercial banks:

In the liability side of the balance sheet of the banking system, there will be no change. In the asset side of the balance sheet of the banking system, treasury bonds will decrease by $1 billion and total reserves at the Fed will increase by $1 Billion.

Now, in the liability side of the Fed's balance sheet, reserves held by the banks, will increase by the $1 Billion and assets side of the Fed's balance sheet, treasury securities increases by $1 Billion.