There are two ways in which the Fed can provide additional reserves to the banking system: it can ________ government bonds or it can ________ discount loans to commercial banks.

Question

Quizplus · Accepted Answer

When the Fed purchases government bonds, it injects additional reserves into the banking system. On the other hand, when the Fed extends discount loans to commercial banks, it allows them to borrow reserves directly from the Fed. Selling government bonds or calling in discount loans would decrease reserves in the banking system.

There Are Two Ways in Which the Fed Can Provide