How does an open market purchase affect the banking system’s balance sheet? What

Question

How does an open market purchase affect the banking system’s balance sheet?

What is the intended impact on the supply of bank loans?

If the opportunity cost adjusted for risk (the difference between the interest rate on loans and the interest rate paid by the Fed on reserves) of holding excess reserves is too high for banks, they:

a. When the Fed purchases securities, it decreases the amount of reserves in the banking system. b. When the Fed purchases securities, the amount of reserves in the banking system remains unchanged.c. c. When the Fed purchases securities, it increases the amount of reserves in the banking system.

Explanation / Answer

1

c. When the Fed purchases securities, it increases the amount of reserves in the banking system.

2

If they earn more on the loans, increased reserves will make the bank to give more loans and hence increase the volume of loans they make

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.