Question

Suppose the Federal Reserve buys $80,000 of Treasury Securities from a Bank. How will it affect the Federal Reserve's balance sheet?

a. Treasury Securities and Capital both rise by $80,000

b. Treasury Securities rise by $80,000 and Federal Reserve Notes fall by $80,000

c. Treasury Securities and Checkable Deposits of commercial banks both rise by $80,000

d. Treasury Securities and Loans to Depository Institutions both rise by $80,000.

Answer 1

When the Federal Reserve conducts an open market purchase of $80,000 worth Treasury Securities from a bank, the Treasury Securities on the balance sheet of the Federal Reserve rise by $80,000. In exchange, the Federal Reserve issues Federal Reserve Notes to the bank. Therefore, the value of Federal Reserve Notes falls by $80,000 on the Fed's balance sheet.

Open market purchase is not a loan extended by the Fed to the bank. Also, open market operations do not affect the checkable deposits of banks.

Ans: b. Treasury Securities rise by $80,000 and Federal Reserve Notes fall by $80,000