If the Fed purchases federal government bonds on the open market, bank reserves will
A) decrease leading to a decrease in the money supply.
B) increase leading to a decrease in the money supply.
C) increase leading to an increase in the money supply.
D) decrease leading to an increase in the money supply.

Question

Quizplus · Accepted Answer

When the Fed purchases federal government bonds on the open market, it injects new reserves into the banking system, which increases bank reserves. This increase in bank reserves enables banks to lend out more money, increasing the money supply. Therefore, purchasing federal government bonds on the open market leads to an increase in the money supply.

If the Fed Purchases Federal Government Bonds on the Open