Which would result from open market purchases made by the Fed totaling $50,000?
A) The money supply would increase by more than $50,000.
B) Interest rates would rise.
C) The money multiplier would increase.
D) Bank reserves would decrease.

Question

Quizplus · Accepted Answer

Open market purchases involve the Fed buying securities from banks, which increases the reserves of those banks. As a result, the banks have additional funds to lend. This leads to an increase in the money supply, which is greater than the initial $50,000 because of the money multiplier effect. Therefore, A is the correct choice. Interest rates would not necessarily rise as a result of this action, nor would the money multiplier increase or bank reserves decrease.

Which Would Result from Open Market Purchases Made by the Fed