If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in:
A) Money supply M1
B) Bank A's excess reserves
C) Bank A's liabilities
D) Bank A's required reserves

Question

Quizplus · Accepted Answer

When the Fed buys government securities from Bank A, it pays Bank A with newly created reserves which will increase Bank A's excess reserves (the reserves held above the required reserve ratio) since the reserves were not previously held. The other options are not directly affected by the transaction.

If the Fed Buys $1 Million in Government Securities from Bank