An open- market purchase of government bonds by the Fed results in _______ in bank reserves and _______ in the supply of money.

Question

Quizplus · Accepted Answer

When the Fed purchases government bonds in the open market, it pays for them by increasing the bank reserves held at the Federal Reserve. Banks now have additional reserves to lend out, increasing the supply of money in the economy. Therefore, an open-market purchase of government bonds by the Fed leads to an increase in bank reserves and an increase in the supply of money.

An Open- Market Purchase of Government Bonds by the Fed