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Suppose the State bank of Pakistan instructs its Trading Desk to purchase Pkr 5 billion of securities. Analyze the result of this transaction on the balance sheets of the State bank of Pakistan and commercial banks.

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Answer:

In simple words, the transaction given in the question will result different for state bank and commercial banks. Assuming the securities will be purchased from the commercial banks, the balance sheet of commercial banks will decrease assets and will increase their cash balance, thus, resulting in overall no change balance on assets side.

On the other hand, the state bank will add securities on the asset side of the balance sheet and will decrease cash balance.

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