The immediate effect of the open market purchase of bonds by the central bank will be:
A) higher excess reserves of banks.
B) lower excess reserves of banks.
C) higher bond-holdings with non-bank public.
D) lower actual reserves of banks.

Question

Quizplus · Accepted Answer

An open market purchase of bonds by the central bank injects money into the banking system, increasing the excess reserves of banks. This is because the central bank pays for these bonds by crediting the banks' accounts, thus increasing their reserves.

The Immediate Effect of the Open Market Purchase of Bonds