Question

Consider a $2 billion open market purchase of U.S. Treasury securities by the Federal Reserve.

The Banking System's balance sheet will specifically show:

a. only an increase in liabilities of $2 billion. b.

b. only a decrease in assets of $2 billion.

c. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.

d. no net change in assets or liabilities, only a change in the composition of assets with securities increasing and reserves decreasing by $2 billion respectively.

Please explain why the answer is correct.

Answer 1

Option C. no net change in assets or liabilities, only a change in the composition of assets with securities decreasing and reserves increasing by $2 billion respectively.

The federal reserve uses the purchase or sale of Treasury securities on short term basis in the market to control inflation in the economy.In our current situation the federal reserve purchased treasury securities in open market. the issuer of such treasury bills is US Government. The Banking System purchased them when they were issued thus it will be an asset for banking system and will appear in Securities. when the federal reserve buys the securities it essentially buying the securities from banking system to control inflation thus it will appear as an increase under Reserves because they will released back into market.

when feral reserve purchases securities are decreased and reserves are increased

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