The Fed sells German bonds to 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

When the Fed sells German bonds to commercial banks, it is essentially exchanging one asset (the bonds) for another (cash). This reduces the Fed's assets (the bonds are removed from its balance sheet) and also reduces its liabilities (as the cash paid by the banks is removed from the banking system's reserves, which are a liability on the Fed's balance sheet). For the commercial banks, the total value of assets and liabilities does not change; they simply swap one asset (cash) for another (the bonds).

The Fed Sells German Bonds to Commercial Banks