Question

Federal Reserve policy requires Sun-Trust Bank to hold 12% of its deposits as reserves. Sun-Trust Bank policy prevents it from holding excess reserves. If the Federal Reserve Bank purchases $20 million in bonds from Sun-Trust what will be the result?
a. Sun-Trust's loan assets decreases by $20 million
b. Sun-Trust's liability decreases by $20 million
c. Sun-Trust's loan assets increases by $20 million the money supply in the economy increases

Answer 1

Answer:

D the money supply in the economy increases

Explanation:

when the Federal reserves purchases $20 million in bons from sun trust Bank, the holdings of sun-trust bank will decrease by $20 million and its reserve increases by $20,million. But sun trust bank policy prevents it from holding excess reserves. so, bank will loan out this excess reserve which in turn will increase the money supply in the economy.

therefore , the correct answer is D the money supply in the economy increases

Answer 2

If the Fed buys bonds from Sun-Trust Bank, the result would be that the money supply in the economy increases.

If the federal reserve purchases bonds:

• They will pay the bank in cash for the bonds
• The cash paid will go into the economy as loans from the bank

The result of the Fed buying bonds from Sun-Trust bank will therefore be that the money supply in the economy will increase as a result of the various loans that will be created.

In conclusion, the money supply in the economy will rise.

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