Total funds of commercial banks will initially ____ by the dollar amount of securities ____ by the Fed.
A) increase; purchased
B) increase; sold
C) decrease; purchased
D) A and B

Question

Quizplus · Accepted Answer

When the Fed purchases securities, it injects reserves into the banking system, increasing the total funds of commercial banks. Therefore, the correct option is A. On the other hand, when the Fed sells securities, it reduces the reserves available to banks, leading to a decrease in the total funds of commercial banks. Therefore, option B is incorrect. Option C is also incorrect since the purchase of securities by the Fed increases the total funds of commercial banks, rather than decreasing it. Option D is incorrect since only option A is correct.

Total Funds of Commercial Banks Will Initially ____ by the Dollar