When the Fed buys government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.

Question

Quizplus · Accepted Answer

When the Fed buys government securities, it pays banks in reserves. Banks then have more reserves, which increases the overall level of reserves in the banking system. This increase in reserves leads to an increase in the quantity of money in circulation because banks can lend out those excess reserves. As the quantity of money increases, the federal funds rate falls because there is more money in the banking system, so banks don't need to borrow as much from one another. Therefore, the correct answer is A.

When the Fed Buys Government Securities, Banks' Reserves ________, the Quantity