The lending ability of commercial banks increases when the
A) reserve ratio is raised.
B) Treasury collects tax revenues.
C) Fed sells securities in the open market.
D) Fed buys securities in the open market.

Question

Quizplus · Accepted Answer

When the Fed buys securities in the open market, it injects new money into the economy. This results in an increase in the reserves of commercial banks, which in turn increases their lending ability. Therefore, option D is the correct answer. Options A and B are incorrect because a higher reserve ratio would reduce lending ability, and tax revenues collected by the Treasury have no direct impact on bank lending. Option C is also incorrect because when the Fed sells securities in the open market, it reduces the reserves of commercial banks, thereby reducing their lending ability.

The Lending Ability of Commercial Banks Increases When the