An open market purchase of securities by the Fed
A) decreases banksʹ reserves and increases banksʹ securities.
B) involves a bank purchasing government securities from the Fed.
C) increases banksʹ reserves and decreases banksʹ securities.
D) decreases banksʹ total assets.

Question

Quizplus · Accepted Answer

An open market purchase by the Fed involves the Fed buying government securities from banks in exchange for cash. This increases banks' reserves (since they receive cash) and decreases their securities (since they sell them to the Fed). Therefore, option C is correct. Option A is incorrect because an open market purchase increases banks' reserves, not decreases them. Option B is incorrect because the bank is not purchasing securities from the Fed, but selling them to the Fed. Option D is incorrect because an open market purchase by the Fed would not decrease banks' total assets.

An Open Market Purchase of Securities by the Fed