The central bank of Westeros bought $\$ 2000$ worth of bonds from the Iron Bank for $\$ 2000$.

How does this affect the Iron Bank's balance sheet?

Choose 1 answer:
(A) Liabilities decrease.
(B) Required reserves increase.
(C) Liabilities increase.
(D) Total assets decrease.
(E) Excess reserves increase.

Question

The central bank of Westeros bought $\$ 2000$ worth of bonds from the Iron Bank for $\$ 2000$.

How does this affect the Iron Bank's balance sheet?

Choose 1 answer:
(A) Liabilities decrease.
(B) Required reserves increase.
(C) Liabilities increase.
(D) Total assets decrease.
(E) Excess reserves increase.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ Understand the transaction: The central bank of Westeros is buying bonds from the Iron Bank for $2000. This means the Iron Bank is selling assets (bonds) and receiving cash in return. ‖ ‖ step 2 ⋮ Analyze the impact on assets: When the Iron Bank sells bonds, it loses that asset, but gains cash. The overall effect on total assets is neutral, as one asset is exchanged for another of equal value. ‖ ‖ step 3 ⋮ Analyze the impact on liabilities: The transaction does not involve the Iron Bank taking on any new debt or obligations, so liabilities do not increase. ‖ ‖ step 4 ⋮ Consider the impact on reserves: The cash received from the central bank can be considered as reserves. Since the Iron Bank has more cash, its reserves increase. This does not necessarily mean that required reserves increase, but it does mean that excess reserves increase. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Impact of bond sale on reserves⚹ ∻Explanation∻ ⚹When a bank sells bonds to the central bank, it receives cash in return, which increases its reserves. This does not affect the total assets or liabilities but increases the excess reserves.⚹◊What is the probability of randomly selecting the correct answer to the multiple-choice question provided?⍭ Generate me a similar question◊$

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