Question

A bank repays its discount loan of​ $250m to the Fed. Identify the effects of this on the balance sheet of the banking system.

Assets?	▼ Securities Loans Reserves Discount Loans	▼ Decrease of $250m No effect Increase of $250m
Liabilities?	▼ Securities Reserves Loans Discount Loans	▼ No effect Decrease of $250m Increase of $250m

This will lead to?

▼

a contraction

an expansion

of liquidity in the banking system.

Answer 1

When Bank Pays $250m  its discount loan to the Fed, It will Result in banks Liability will be reduced. Because Bank paying out its loan. But in the Other Hand Banks reserve of $250m will reduce because Banks will able to pay its loan only if ut us holding  $250m of the reserve. So Assets will be reduced by $250m also.

Ans :

Assets: Decrease of $250m

Liabilities: Decrease of $250m

A Typical Banks Balance Sheet :

Affect of this Will Lead to Contraction. Because reserves are considered as the most liquid assets of Banks. As reserve value goes down by $250m will lead to a Contraction in Banks overall liquidity. (Ans)