If the Fed buys a $1,000 U.S.government bond from a bank,it pays for it by giving the bank $1,000 in reserves-reserves that it simply creates out of thin air.

Question

Quizplus · Accepted Answer

This is true. When the Fed buys a government bond from a bank, it creates new reserves by crediting the bank's reserve account. These reserves are created electronically and do not come from any existing pool of funds. Therefore, the Fed can create reserves "out of thin air."

If the Fed Buys a $1,000 U