When the Fed buys government securities on the open market

Question

Quizplus · Accepted Answer

When the Fed buys government securities on the open market, it increases the money supply and injects cash into the economy. This purchase puts money into the hands of the seller, who deposits it in their bank. The banks deposit this money with the Fed, which creates reserve balances for the banks. This increases their total reserves and allows them to lend out more money, which subsequently boosts economic activity. As a result, bank reserves increase.

When the Fed Buys Government Securities on the Open Market