If a $1 million open market purchase by the Fed generates a new deposit at a bank that immediately causes the bank's reserves held at the Fed to increase by $1 million, then the T-account effects are that the bank's assets and liabilities ________ by $1 million and that the Fed's assets and liabilities ________ by $1 million.

Question

Quizplus · Accepted Answer

When the Fed makes an open market purchase of $1 million, it creates a new deposit for the bank, which increases the bank's reserves by $1 million. This increases the bank's assets by $1 million (the new reserves) and liabilities by $1 million (the new deposit). At the same time, the Fed's assets increase by $1 million (the Treasury securities purchased) and its liabilities increase by $1 million (the new reserves created for the bank). Therefore, both the bank's and the Fed's assets and liabilities increase by $1 million, leading to the choice of answer D.

If a $1 Million Open Market Purchase by the Fed