If the Fed buys a $1,000 U.S.government bond from a bank,it pays it by giving the bank $1,000 in reserves--reserves that it simply creates out of thin air.

Question

Quizplus · Accepted Answer

This statement is true. When the Fed buys a government bond from a bank, it creates the necessary reserves to pay for the bond out of thin air. This is one way that the Fed can increase the money supply and stimulate economic growth.

If the Fed Buys a $1,000 U