When the Fed buys U.S. government securities, the money supply

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When the Fed buys U.S. government securities, the bond dealer's bank receives payment in the form of reserves. This payment increases the bank's reserves, allowing it to make new loans, which in turn increases the money supply. Furthermore, the bond dealer's bank may choose to hold some of the new reserves as excess reserves, which can be deposited in their transaction account. The increase in the bank's transaction deposits increases the money supply even further, as these deposits can be used to make new loans or make payments. There is no offsetting reduction in transaction deposits at any other bank, so the money supply increases overall.

When the Fed Buys U