Question

Explain the impact on the Fed's balance sheet from a $10 million open market purchase of U.S.

Treasury Securities. Be sure to identify which categories of assets and liabilities change and by what amounts.

Answer 1

The purchase of $10 million open market bond from the market will lead to a decrease in the money supply in the economy. The interest rate will thus increase, and the money left for the commercial banks to borrow thus becomes less. The increase in the cost of borrowing thus increase the interest rate, thus individuals will save their money. Higher rates of interest gives the individuals an incentive to save their money. This spending less on the economy will lead to a less investment on the capital markets and thus slowing down he inflation rate.