A commercial bank buys a $50,000 government security from a securities dealer. The bank pays the dealer by increasing the dealer's checkable deposit balance by $50,000. The money supply has:

Question

Quizplus · Accepted Answer

When the commercial bank buys a government security, it increases its assets by $50,000 and its liabilities by $50,000 (the checkable deposit balance of the dealer). This increase in liabilities creates new money and thereby increases the money supply by $50,000. Therefore, the correct answer is (C) Increased by $50,000.

A Commercial Bank Buys a $50,000 Government Security from a Securities