Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and the amount of cash held by the public does not change?
A) The required reserve ratio will increase.
B) The money supply will decrease.
C) The deposits of commercial banks will decline.
D) Commercial bank reserves will increase.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys bonds from the public in the open market, it injects money into the economy. This money typically ends up in the hands of commercial banks, which increases their reserves. Therefore, the correct answer is that commercial bank reserves will increase (option D). None of the other options are accurate: the required reserve ratio doesn't change in response to open market operations (option A); the money supply increases, not decreases, when the Fed buys bonds (option B); and the deposits of commercial banks don't decline, because the banks end up with more reserves as a result of the Fed's purchase (option C).

Which of the Following Will Happen When the Federal Reserve