The Fed's purchase of U.S. government securities constitutes
A) a restrictive policy because it lowers the amount of total reserves in the banking system.
B) a restrictive policy because it lowers the amount of excess reserves in the banking system.
C) an expansionary policy because it raises the amount of total reserves in the banking system.
D) an expansionary policy because it lowers the amount of required reserves in the banking system.

Question

Quizplus · Accepted Answer

When the Fed purchases U.S. government securities, it is injecting money into the banking system, which increases the total reserves available to the banks. This is an expansionary policy as it stimulates economic activity by encouraging banks to lend more. Option A and Option B are incorrect because purchasing securities increases reserves, rather than decreasing them. Option D is incorrect because the Fed's purchase of securities does not directly impact the amount of required reserves in the system.

The Fed's Purchase of U.S. Government Securities Constitutes