Here is how an open market purchase works: The Fed __________ government securities to (from)a commercial bank,which raises the bank's deposits at the __________ and increases the bank's __________.
A) sells; Fed; reserves
B) buys; Fed; reserves
C) buys; Treasury; discount loans
D) sells; Treasury; required reserve ratio
E) buys; Fed; liabilities

Question

Quizplus · Accepted Answer

An open market purchase is when the Fed buys government securities from a commercial bank, increasing the bank's reserves at the Fed and ultimately increasing the bank's ability to lend. Therefore, the correct choice is B, where the Fed buys government securities from the commercial bank, increasing the bank's deposits at the Fed and reserves. Choice A is incorrect because the Fed would be selling government securities, not buying them. Choice C is also incorrect because the Fed is not buying from the Treasury, but purchasing from a commercial bank. Choice D is incorrect because the Treasury is not involved in an open market purchase, and the required reserve ratio is not affected. Choice E is incorrect because liabilities are not generally affected by open market purchases.

Here Is How an Open Market Purchase Works: the Fed