If the Fed buys a U.S.Treasury bill from a member of the public, the banking system has
A)less reserves and the money supply tends to fall.
B)more reserves and the money supply tends to fall.
C)less reserves and the money supply tends to grow.
D)more reserves and the money supply tends to grow.

Question

Quizplus · Accepted Answer

When the Fed buys a U.S. Treasury bill from a member of the public, the member of the public receives payment from the Fed. This increases the reserves of the member of the public's bank and as a result, the banking system as a whole has more reserves. When the banking system has more reserves, it is able to lend out more money, leading to an increase in the money supply. Therefore, the correct answer is D) more reserves and the money supply tends to grow.

If the Fed Buys a U