Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank.As a result, the monetary base ________ and the quantity of money will ________ $50 million due to the ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys securities from a commercial bank, it pays for those securities by crediting the commercial bank's account at the Fed. This increases the reserves of the commercial bank, which in turn increases the monetary base (required reserves and currency in circulation). The quantity of money will increase by more than $50 million because of the money multiplier effect, where loans and deposits increase in the banking system. Therefore, the correct choice is A.

Suppose the Federal Reserve Buys $50 Million Worth of Securities