An open-market purchase by the Federal Reserve injects excess reserves into the banking system and allows the money supply to expand.

Question

Quizplus · Accepted Answer

When the Federal Reserve conducts an open-market purchase, it buys securities from the public, which increases the reserves of the sellers. These sellers deposit the funds into their bank accounts, which increases the reserves of their banks. As a result, the banks now have excess reserves, which they can use to make loans and create new deposits, expanding the money supply.

An Open-Market Purchase by the Federal Reserve Injects Excess Reserves