Question

Briefly describe what happens when the Federal Reserve does the following.

a. Buys a Treasury bond from a bank:




b. Sells a Treasury bond to a bank:

Answer 1

a

Step-by-step explanation:

We are given to explain the effect on the interest rate that bank will charge its customer for a loan if the bank buys a treasury bond from the federal reserve.

Since the bank is buying a treasury bond from the federal reserve, so it is obvious that the bank has very less amount of funds. Because of that it has to buy from the federal reserve. Therefore, to increase the funds, the bank will definitely charge more interest from its customers.

Thus, the bank will increase interest rate that it will charge its customers for a loan because of the fewer funds available.