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?

Answer 1

Answer: . Northern's loan assets increase by $30 million

Explanation: Central Bank policy requires Northern Bank to hold 10% of its deposits as reserves. However, Northern Bank policy prevents it from holding excess reserves, If the central bank purchases $30 million in bonds from Northern Bank, then Northern's bank loan assets automatically increase by $30 million.