Question

Central Bank policy requires Northern Bank to hold 10% of its deposits as reserves. Northern Bank policy prevents it from holding excess reserves. If the central bank purchases $30 million in bonds from Northern Bank what will be the result?
A. Northern's loan assets increase by $30 million.
B. Northern's bond assets increase by S30 million.
C. Northern's net worth changes by $30 million.
D. the money supply in the economy decreases.

Answer 1

Answer:

A) Northern's loan assets increase by $30 million.

Explanation:

Northern Bank is required to hold 10% of its deposits as reserves but that requirement does not apply to money it receives by issuing bonds. The total amount of the money that Northern Bank got from issuing bonds can be used to give loans to their clients.

Generally deposits reserves are used to secure that the bank's customers will be able to get their money back whenever they want. Of course no one expects all the customers will want their money at the same time, that is why the reserve level is only 10%.