When the Fed buys government securities in the open market,the money supply ________ because ________.
A)decreases;banks lose liquidity,they make fewer loans and checking account deposits decrease
B)increases;banks gain liquidity,they make more loans and checking account deposits increase
C)increases;banks lose liquidity,they make more loans and checking account deposits increase
D)decreases;banks gain liquidity,they make fewer loans and checking account deposits decrease
E)none of the above

Question

Quizplus · Accepted Answer

When the Fed buys government securities, it injects money into the banking system, which increases banks' reserve balances and provides them with more liquidity. This, in turn, enables banks to make more loans and create more deposits, which increases the money supply. Therefore, the correct answer is (B) increases; banks gain liquidity, they make more loans and checking account deposits increase.

When the Fed Buys Government Securities in the Open Market,the