If the Fed buys U.S. government bonds from the public, it
A) increases the volume of reserves in the banking system and the money supply tends to grow.
B) decreases the volume of reserves in the banking system and the money supply tends to grow.
C) increases the volume of reserves in the banking system and the money supply tends to fall.
D) decreases the volume of reserves in the banking system and the money supply tends to fall.

Question

Quizplus · Accepted Answer

When the Fed buys U.S. government bonds from the public, it increases the volume of reserves in the banking system, which can encourage banks to lend more money. This increase in lending can lead to an expansion of the money supply. Therefore, choice A is the correct answer. Choices B, C, and D are incorrect because they suggest a decrease in reserves or a fall in the money supply, which is not the expected outcome when the Fed buys government bonds.

If the Fed Buys U