If the Fed makes an open market purchase of $1 million of government securities,the monetary base
A)is decreased by $1 million.
B)is unchanged in size,though its composition changes.
C)is increased by $1 million.
D)will decrease by a multiple of $1 million over time.
E)will increase by a multiple of $1 million over time.

Question

Quizplus · Accepted Answer

An open market purchase of government securities by the Fed leads to an increase in the monetary base. In this case, the Fed is injecting $1 million into the economy by purchasing government securities from market participants. This increases the reserves of the banks who sold the securities to the Fed, allowing them to create more loans and increase the money supply. Therefore, the monetary base increases by the same amount as the open market purchase, which is $1 million in this case.

If the Fed Makes an Open Market Purchase of $1