When the Fed buys securities, how much cash is held by the public affects the change in the

Question

Quizplus · Accepted Answer

When the Fed buys securities, it injects liquidity into the banking system, which increases the reserves of banks. This, in turn, affects the money supply because banks can then lend more, creating more money through the money creation process. The amount of cash held by the public can influence how much money banks can create, as it affects the reserves they have available for lending. The monetary base is directly affected by the Fed's actions (buying or selling securities), but the question specifically asks about the impact of the amount of cash held by the public, which directly influences the money supply rather than the monetary base or the money multiplier itself. The money multiplier is a concept that describes how changes in the monetary base affect the money supply, but the amount of cash held by the public is not a direct factor in the multiplier itself; it's more about how the initial injection of liquidity (or withdrawal of it) is magnified through the banking system.

When the Fed Buys Securities, How Much Cash Is Held