The lending ability of commercial banks increases when the:
A) Reserve ratio is raised
B) Treasury collects tax revenues
C) Fed sells securities in the open market
D) Fed buys securities in the open market

Question

Quizplus · Accepted Answer

When the Fed buys securities in the open market, it injects money into the banking system which increases the reserves of commercial banks. As a result, banks have more money to lend, and their lending ability increases. This is known as open market operations and is a common way the Fed affects monetary policy.

The Lending Ability of Commercial Banks Increases When The