Which of the following statements is true when the Fed increases reserves by buying a government bond from a bank?
A)The amount of reserves in the banking system will increase by an amount greater than the amount of the bond purchase.
B)The amount of loans made by the banking system will increase by the amount of the bond purchase.
C)The amount of loans made by that bank will be greater than the increase in reserves.
D)The amount of deposits made by the banking system will increase by the amount of the bond purchase.
E)The amount of reserves in the banking system will increase by the amount of the bond purchase.

Question

Quizplus · Accepted Answer

When the Fed increases reserves by buying a government bond from a bank, the bank's reserves increase by the amount of the bond purchase. Therefore, the amount of reserves in the banking system will increase by the amount of the bond purchase. Option A is incorrect because the increase in reserves is exactly the same as the amount of the bond purchase. Option B is incorrect because the amount of loans made by the bank will depend on several factors, including the bank's lending standards and the demand for loans. Option C is incorrect because the increase in reserves is exactly the same as the amount of the bond purchase. Option D is incorrect because the increase in deposits will depend on whether the bank holds onto the additional reserves or lends them out.

Which of the Following Statements Is True When the Fed