When the Fed buys one million dollars in government securities from a commercial bank,

Question

Quizplus · Accepted Answer

When the Fed buys government securities from a commercial bank, the commercial bank's reserves increase while government securities decrease. This leads to a change in the composition of the commercial bank's assets. Although the Fed is paying one million dollars for the securities, this does not mean that the Fed's total assets decrease by the same amount. This is because the Fed is creating new money to pay for the securities, which adds to its total assets. Therefore, options A and B are incorrect.

When the Fed Buys One Million Dollars in Government Securities