When the Fed buys $100 million of securities from a commercial bank,the
A)monetary base increases.
B)money supply decreases.
C)bank's reserves decrease.
D)required reserve ratio decreases.
E)bank is risking its depositors' money.

Question

Quizplus · Accepted Answer

When the Fed buys securities from a commercial bank, it pays for them by increasing the bank's reserves. As a result, the bank's reserves increase by $100 million, which in turn increases the monetary base. The monetary base, also known as high-powered money, is the sum of currency in circulation and bank reserves. Therefore, choice A is correct. Choices B, C, D, and E are incorrect.

When the Fed Buys $100 Million of Securities from a Commercial