Question

The Bank of Canada sells U.S. Treasury bonds to chartered banks. Which of the following best describes the impact on the Bank's and the Banking System's balance sheets resulting from this transaction?

a.
The Bank's assets and liabilities increase, the banking systems assets and
liabilities decrease.
b. The Bank's assets increase and its liabilities both increase. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.
c. The Bank's assets and liabilities do not change, only the compositions of the assets change. For the banking system, assets and liabilities increase.
d. The Bank's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

Answer 1

*ANSWER :: (D) The Bank's assets and liabilities both decrease. For the banking system, the value of assets and liabilities do not change, only the composition of assets changes.

=> Explanation ::

->   By The Use Of Open Market Operation Bank Of canada Control Money Supply In The Economy. If Bank Of Canada Sell Bonds They Have To Decrease The Money Supply and When They Purchase The Bonds In Open Market They Increase The Money Supply In The Economy.

-> In This Situation Bank Of Canada Sell U.S Bonds To Chartered Bank To Decrease the Money Supply. So In This Transaction It Decrease The Central Bank Of Canada's Assets And Liability Both Because They Sell Their Bonds To The Chartered Bank So Their Assets and Liability Decrease But It Does Not Change The Value of Banking System's Assets and Liability Because They Receive Assets In Exchange Of Cash So It change Only the Composition Of Assets.

-> So By Selling The Bonds Central Bank Remove The Excess Cash From The Banking System so It Decrease The Money Supply.