Question

if the federal reserve sells a treasury bond to a bank, what will be the effect on the interest rate the bank changes it customers for a loan?

Answer 1

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

Answer 2

If the federal reserve sells a treasury bond to the bank then it will reduced the money available with bank for loans. This situation is likely to increase the rate of interest the bank charges it to customers for a loan.

• The federal reserve when sells a treasury bond to a bank this will limit the financial reserves available with bank.
• It will become difficult for the bank to provide loan to each and every customer initially in order to circulate the money.
• So, the bank will like to raise the interest rates for loan to gain some profit on the lend money so that it can help in recovering the financial reserves in bank.

Hence, the interest rates the bank charges on the customers for a loan will increase.

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