Question

question 5 of 10
if the federal reserve buys a treasury bond from a bank, what will be the
effect on the interest rate the bank charges its customers for a loan?

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

b. the interest rate will decrease since there are more available
funds for the bank to loan.

c. the interest rate will decrease since there are fewer available
funds for the bank to loan.

d. the interest rate will increase since there are more available funds
for the bank to loan.

Explanation:

When the Federal Reserve buys a Treasury bond from a bank, it injects money into the bank (the bank receives payment for the bond). This increases the bank's available funds for lending. In the loan market, when supply (of loanable funds) increases, the price of borrowing (interest rate) typically decreases, as banks compete to lend out the extra funds. So the interest rate the bank charges customers will decrease because there are more funds to loan.

Answer:

B. The interest rate will decrease since there are more available funds for the bank to loan.