Question

b. Describe how the balance sheet of the Fed is affected under each of these scenarios (point out changes to both assets and liabilities) and defend your answer: (a) The Fed sells $1 million dollar's worth of government bonds to banks. (b) $1 million dollar's worth of mortgage-backed securities held by the Fed expire and are paid in full by the issuers of those securities. (c) $1 million dollar's worth of mortgage-backed securities held by the Fed expire and only 75% is paid back; the rest is defaulted on.
Please explain the effect of each of these senarios on the assets and liabilities of the Fed. Thanks!

Answer 1

ANSWER:In general terms assets used to put money with you while liabilities takes money from you.

A-Hence as we know Government bonds come under assets of Fed bank so when it is selling $1 million dollars government bonds to banks then by doing so it is gaining money by selling its assets.Hence it is liable to pay in future for these bonds.

B-In this statement securities held by fed expires but paid in full by the issuer of security hence there os increase in assets of feb and decrease on its liabilities.

C-While in this statement only 75% securities are been paid back by issuer it means 25% still defaulted hence bank is still liable to pay for those 25% to those who bought it it means this situation has increased its liabilities while decreased its assets.