When the Fed purchases government securities, it:
A) increases banks' reserves and makes possible an increase in the money supply.
B) decreases banks' reserves and makes possible a decrease in the money supply.
C) automatically raises the discount rate.
D) uses discounting operations to influence margin requirements.
E) has no effect on either the money supply or the discount rate.

Question

Quizplus · Accepted Answer

When the Fed purchases government securities, it increases banks' reserves. This increase in reserves allows banks to increase their lending, which in turn leads to an increase in the money supply. Therefore, choice A is the correct answer.

When the Fed Purchases Government Securities, It