An open market ________ leads to a(n)________ of reserves and deposits in the banking system and hence to a(n)________ of the monetary base and the money supply.
A) sale; expansion; contraction
B) purchase; expansion; contraction
C) sale; expansion; expansion
D) purchase; expansion; expansion

Question

Quizplus · Accepted Answer

When the central bank purchases securities in the open market, it injects new reserves into the banking system. Banks can use these excess reserves to make new loans, leading to an expansion of deposits and an increase in the money supply. This process leads to both an expansion of the monetary base (through the injection of reserves) and an expansion of the money supply (through the multiplier effect).

An Open Market ________ Leads to A(n)________ of Reserves and Deposits

An Open Market Leads to A(n) of Reserves and Deposits