When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by
A)more than $200.
B)exactly $200.
C)less than $200.
D)None of the above are correct.

Question

Quizplus · Accepted Answer

When the Fed purchases $200 worth of government bonds from the public, it is injecting new reserves into the banking system. These reserves can then be multiplied through the money-creation process, leading to a larger increase in the money supply. The exact amount by which the money supply will increase is uncertain and depends on factors such as the reserve requirement and the willingness of banks to lend. In practice, the increase in the money supply is likely to be more than $200.

When the Fed Purchases $200 Worth of Government Bonds from the Public