Asked by Nacosha Lloyd on Mar 10, 2024
Verified
When the Fed buys government bonds, the reserves of the banking system
A) increase, so the money supply increases.
B) increase, so the money supply decreases.
C) decrease, so the money supply increases.
D) decrease, so the money supply decreases.
A) increase, so the money supply increases.
B) increase, so the money supply decreases.
C) decrease, so the money supply increases.
D) decrease, so the money supply decreases.
Fed Buys Government Bonds
The action by the Federal Reserve to purchase government securities from the market, which increases the money supply and lowers interest rates.
Banking System Reserves
The portion of deposits that banks must hold in reserve and not lend out, often held at the central bank to ensure liquidity.
Money Supply
The sum of financial resources, comprising cash and deposits in banks, accessible in an economy at a particular moment.
- Grasp how the Federal Reserve's actions affect the banking system's reserves and thereby the money supply.
Verified Answer
AR
Aerial Ridley
Mar 10, 2024
Final Answer :
A
Explanation :
When the Federal Reserve buys government bonds, it pays for these bonds by adding credit to the banks' reserves, which increases the reserves of the banking system. This increase in reserves allows banks to lend more, thereby increasing the money supply.
Learning Objectives
- Grasp how the Federal Reserve's actions affect the banking system's reserves and thereby the money supply.