If the Fed buys government bonds, then all of the following will likely increase EXCEPT
A) the monetary base.
B) M1.
C) the Federal Funds rate.
D) bank reserves.

Question

Quizplus · Accepted Answer

When the Fed buys government bonds, it injects money into the banking system and increases bank reserves. This, in turn, increases the monetary base and M1. However, by increasing bank reserves, the Fed will make it easier for banks to lend to each other, which will put downward pressure on the Federal Funds rate, causing it to decrease. Therefore, choice C is the only option that will likely decrease when the Fed buys government bonds.

If the Fed Buys Government Bonds, Then All of the Following