Question

Consider an open market purchase by the Fed of $3 billion of Treasury bonds. What is the impact of the purchase on the bank from which the Fed bought the securities

Answer 1

With the purchase of the bonds, the money supply in the bank will increase.

Explanation:

Open market purchase strategy or method is a method that the government uses to control supply of money in the economy of a country. If the money supply increases in the economy, then the government sells the treasury bonds to the public to decrease money in hand and if money supply decreases then it buys bonds from public to increase the money in their hand so that they buy more products and the economy grows.

So if for this purpose, the government will buy the treasury bonds from a bank, then the money supply with that bank will increase.