Question

if a bank buys a treasury bond from the federal reserve what will be the effect on the interest rate the bank charges its customer for a loan?

Answer 1

The interest rate will increase since there are fewer available funds for the bank to loan.

Answer 2

Answer: The answer is increase in the interest rate.

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.