When the Federal Reserve purchases a government bond from a primary dealer,reserves in the banking system ________ and the monetary base ________,everything else held constant.

Question

Quizplus · Accepted Answer

When the Federal Reserve purchases a government bond from a primary dealer, it pays for it by crediting the account of the primary dealer, which increases the reserves in the banking system. This, in turn, increases the monetary base, which is the sum of currency in circulation and reserves held by banks at the Federal Reserve. Therefore, both reserves in the banking system and the monetary base increase, holding everything else constant.

When the Federal Reserve Purchases a Government Bond from a Primary