When the Open Market Committee buys $1 million worth of bonds, $1 million of reserves is instantly put into the banking system.

Question

Quizplus · Accepted Answer

When the Open Market Committee buys bonds, they are purchased from banks or private holders. In exchange for the bonds, the banks or private holders receive payment, which is credited to their reserve accounts at the Federal Reserve. This increases the amount of reserves in the banking system by the same amount as the purchase price of the bonds. Therefore, if the Open Market Committee buys $1 million worth of bonds, $1 million of reserves is instantly put into the banking system.

When the Open Market Committee Buys $1 Million Worth of Bonds