When the Reserve bank buys securities in open market operations,it
A)pays with newly created deposits.
B)pays with new banks notes.
C)pays for the securities with gold.
D)pays with newly created bank reserves,which increases the monetary base.
E)pays for the securities with an increase in the monetary quantity.

Question

Quizplus · Accepted Answer

When the Reserve bank buys securities in open market operations, it pays for the securities with newly created bank reserves. This increases the monetary base, which is the total amount of currency in circulation plus the reserves held by banks, thereby increasing the money supply in the economy. The newly created bank reserves are credited to the accounts of the banks that sell the securities to the Reserve bank, which in turn enables them to lend more and thereby expands the overall credit in the economy.

When the Reserve Bank Buys Securities in Open Market Operations,it