The Bank of Pitland, which is the highest financial institution ...

[HCHenry]

The Bank of Pitland, which is the highest financial institution in Pitland, has bought treasury bonds worth 2.2 billion from a private bank. How will this transaction affect the balance sheets of the private bank and the Bank of Pitland?
 
  What will be an ideal response?

Question 2

Demand deposits are termed so because:
 
  A) depositors can withdraw money from such deposits at any point of time.
  B) there are no limitations on the amount of money that can be deposited into such accounts.
  C) depositors can demand any rate of interest on such deposits.
  D) most consumers want to open such accounts as they are greatly in demand.

[hanadaa]

Answer to Question 1

The private bank will have 2.2 billion more in bank reserves on deposit at the Bank of Pitland and own 2.2 billion less in bonds: those are the bonds that the bank gave to the bank of Pitland in this transaction. On the assets side of its balance sheet, the private bank will have an extra 2.2 billion in bank reserves that it received in exchange for the 2.2 billion in bonds that are now owned by the Bank of Pitland and appear on its balance sheet. The private bank's total assets will remain unchanged, though the composition of assets will tilt away from bonds and toward bank reserves.

Answer to Question 2

A