If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
A) It will give the bank new reserves.
B) It will write the bank a check.
C) It will transfer cash to the bank's vault.
D) It will take reserves from another bank.

Question

Quizplus · Accepted Answer

When the Fed buys a T-bill from a commercial bank, it will pay for the T-bill by giving the bank new reserves. This will increase the bank's reserves and allow it to increase its lending and money creation ability. Writing a check or transferring cash would not be necessary as the payment can be made simply by creating new reserves. Taking reserves from another bank would also not be necessary as the Fed can create new reserves through open market operations.

If the Fed Buys a T-Bill from a Commercial Bank