3. In August 2010, the Federal Reserve announced that as the mortgage-backed sec

Question

3. In August 2010, the Federal Reserve announced that as the mortgage-backed securities it owns matured, it would reinvest the funds by buying U.S. Treasury securities. What impact would these actions have on the size of the Fed's balance sheet? The size of the balance sheet would (1) Would the Fed be more likely to take this action if it saw future U.S. economic growth as being strong or as being weak? A. The Fed would most likely do this if the economy were strong. O B. The answer depends on U.S. policy in the future. O C. The Fed would most likely do this if the economy were weak. D. The Fed would most likely do this if the level of economic growth rem ained stable for at least a decade (1) O stay the same O decrease O increase

Explanation / Answer

PART-1) Solution: stay the same

Explanation: Since the the mortgaged-backed securities will be replaced with U.S. Treasury securities thus size of balance sheet would remain the same

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PART-2) Solution: The FED would most likely do this if the economy were weak

Explanation: Because the the result would likely be to raise the demand for Treasury securities, increasing their prices, and driving down their yields

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