If the Fed purchases securities in the amount of $100,000 from First Union Bank,then the
A)assets of First Union Bank decrease by $100,000.
B)assets of the Fed decrease by $100,000.
C)assets of First Union Bank change in composition but not in amount.
D)liabilities of the Fed change in composition but not in amount.
E)liabilities of First Union decrease by $100,000.

Question

Quizplus · Accepted Answer

When the Fed purchases securities from First Union Bank, First Union Bank's assets will decrease by the amount of the securities sold (in this case, $100,000). However, the composition of First Union Bank's assets will change because they will now have an increased amount of cash (the payment received from the Fed) and a decreased amount of securities. The Fed's assets will increase by $100,000 in the form of the securities purchased. The liabilities of both the Fed and First Union Bank will also remain the same, as there is no change in the amount of reserves or deposits involved in the transaction.

If the Fed Purchases Securities in the Amount of $100,000