The purchase of $1 million of Treasury securities by the Federal Reserve,if there is no change in the quantity of currency,will cause reserves at banks to

Question

Quizplus · Accepted Answer

When the Federal Reserve purchases $1 million worth of Treasury securities from a bank, it pays for them with a credit to the bank's reserve account held at the Fed. This increases the bank's reserves by $1 million because reserves are defined as deposits held by a bank at the Fed plus currency held by the bank. Since the quantity of currency does not change in this scenario, the increase in reserves will be exactly equal to the amount of the Treasury securities purchased.

The Purchase of $1 Million of Treasury Securities by the Federal