Question

If commercial banks deposits are stable and the central bank purchased securities from commercial banks, this would:_______

a. Decrease reserves and increase leverage
b. Increase reserves and decrease leverage
c. Decrease total assets
d. Increase total assets
e. Both B and D

Answer 1

Answer: e. Both B and D

Step-by-step explanation:

When the Central bank purchases securities, this is an expansionary monetary policy tool because it is introducing money into the economy. When the CB buys securities from commercial banks, the money that they pay to these banks will increase their reserves which will decrease their leverage.

With higher cash holdings, the banks will have more money to loan out which means that their total assets will increase as well.