The Fed buys securities and gives the bank a check for the amount. After the check has cleared,
A) reserves have increased by the amount of the check because the Fed pays for the check by increasing the amount of the bankʹs deposits with the Fed.
B) reserves have decreased by the amount of the check because the Fed pays for the check by decreasing the bankʹs deposits at the Fed.
C) reserves remain unchanged because the increase of reserves at the bank are offset by an increase in reserves at the Fed.
D) reserves have increased by the amount of the reserves multiplied by the required reserve ratio, and the quantity of money increases by the difference between the amount of the check and the increase in the reserves.

Question

Quizplus · Accepted Answer

When the Fed buys securities from a bank, it gives the bank a check for the amount. The bank can then deposit this check into its account with the Fed, which increases the bank's deposits with the Fed. This increase in deposits with the Fed leads to an increase in reserves for the bank, as the reserves held by the bank are backed by its deposits at the Fed. Therefore, choice A is the correct answer.

The Fed Buys Securities and Gives the Bank a Check