Federal Reserve policy requires Sun-Trust Bank to hold 12% of its deposits as reserves. Sun-Trust Bank policy prevents it from holding excess reserves. If the Federal Reserve Bank purchases $20 million in bonds from Sun-Trust what will be the result?

a. Sun-Trust's loan assets decreases by $20 million

b. Sun-Trust's liability decreases by $20 million

c. Sun-Trust's loan assets increases by $20 million the money supply in the economy increases

the money supply in the economy increase

Explanation:

If the Federal Reserve Bank buys $ 20 million in Sun-Trust bonds, the money supply in the economy will increase. This is because this purchase allows Sun-trust to increase its reserve by $ 20 million, generating an excess reserve. However, as you saw in the question above, the bank does not accept that the institution maintains excess reserves, which will cause the bank to make loans with this excess. These loans will throw more money on the market, allowing the money supply to rise in the economy.

D the money supply in the economy increases

Explanation:

when the Federal reserves purchases $20 million in bons from sun trust Bank, the holdings of sun-trust bank will decrease by $20 million and its reserve increases by $20, million. But sun trust bank policy prevents it from holding excess reserves. so, bank will loan out this excess reserve which in turn will increase the money supply in the economy.

therefore, the correct answer is D the money supply in the economy increases