Which of the following transactions has the immediate effect of increasing the money supply M1?
A) A commercial bank accepts deposits from its customers.
B) A commercial bank lends some excess reserves in the federal funds market.
C) A commercial bank increases its reserve holdings.
D) A commercial bank buys government securities from the general public.

Question

Quizplus · Accepted Answer

When a commercial bank buys government securities from the general public, it pays for them by creating new deposits in the accounts of the sellers. This increases the total amount of deposits in the banking system and thus increases the money supply (M1).

Which of the Following Transactions Has the Immediate Effect of Increasing