The Fed purchases German bonds from commercial banks. Which of the following best describes the impact on the Fed's and the Banking System's balance sheets resulting from this transaction?

Question

Quizplus · Accepted Answer

The purchase of German bonds from commercial banks by the Fed results in an increase in the Fed's assets (the German bonds) and its liabilities (the reserves it uses to purchase the bonds). For the banking system, the value of assets and liabilities do not change, only the composition of assets changes (they exchange German bonds for reserves held at the Fed). Therefore, the correct answer is B.

The Fed Purchases German Bonds from Commercial Banks