Which of the following happens if the Fed buys bonds from a private bank?
A) The private bank's total assets remain unchanged.
B) The private bank's composition of assets remain unchanged.
C) The Fed's total assets decrease.
D) The Fed's total liabilities remain unaffected.

Question

Quizplus · Accepted Answer

When the Fed buys bonds from a private bank, it increases the private bank's reserves held at the Fed. This increases the private bank's ability to make loans and potentially stimulates economic growth. However, the private bank's total assets remain unchanged as it has exchanged bonds for reserves held at the Fed. The Fed's total assets increase as it now holds the bonds previously owned by the private bank. The Fed's liabilities also increase as it has created reserves to pay for the bonds it purchased from the private bank.

Which of the Following Happens If the Fed Buys Bonds