Suppose the Fed purchases $5,000 in U.S.government securities from the Last National Bank and the Last National Bank's account at the Federal Reserve district bank increases by $5,000.Which of the following results from this transaction?

Question

Quizplus · Accepted Answer

The purchase of government securities by the Fed from the Last National Bank results in an increase in the bank's reserves, which increases its capacity to lend. As a result, the composition of the bank's assets changes because it now holds more reserves and fewer government securities. Only option A describes this change in the bank's balance sheet. The other options are incorrect: B is incorrect because liabilities do not necessarily increase when assets increase; C is incorrect because the Fed's assets do not fall with this transaction; D is incorrect because both assets and liabilities are affected by the transaction; E is incorrect because the purchase of securities increases the money supply.

Suppose the Fed Purchases $5,000 in U