A open market purchase of government securities by the Fed will cause which of the following?

Question

Quizplus · Accepted Answer

An open market purchase of government securities by the Fed injects reserves into the banking system, leading to an increase in the supply of reserves. This, in turn, will reduce the federal funds rate (Choice A), as banks will have excess reserves to lend to one another. Additionally, the increase in the supply of reserves will increase the amount of excess reserves that banks will wish to hold (Choice B). Finally, an open market purchase also increases the equilibrium quantity of reserves (Choice C).

A Open Market Purchase of Government Securities by the Fed