When the Fed buys one million dollars in government securities from a commercial bank,

Question

Quizplus · Accepted Answer

When the Fed buys one million dollars in government securities from a commercial bank, the commercial bank's reserves increase by one million dollars, and their holdings of government securities decrease by one million dollars. This means there is a change in the composition of the commercial bank's assets: reserves increase and government securities decrease. The Fed's total assets also increase by one million dollars, not decrease as stated in option B. Option A is incorrect because the commercial bank's total assets do not increase by one million dollars; only their reserves increase. Therefore, the best choice is C.

When the Fed Buys One Million Dollars in Government Securities