When chartered banks use excess reserves to buy government securities from the public:

Question

Quizplus · Accepted Answer

When chartered banks use excess reserves to buy government securities from the public, they are effectively creating new money. This is because the money used to purchase the securities was not previously in circulation, and the seller of the securities now has additional funds to use in the economy. This increases the money supply. Chartered bank reserves may also increase, but option A is the best choice because it directly addresses the creation of new money. Demand deposits may either increase or remain unchanged, depending on how the seller of the securities chooses to use their newly acquired funds.

When Chartered Banks Use Excess Reserves to Buy Government Securities