Suppose the Federal Reserve buys $50 million worth of securities from a commercial bank.As a result,the monetary base ________,and the quantity of money will ________ $50 million due to the ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys securities from a commercial bank, it pays for them by increasing the bank's reserve balance. This increases the monetary base (reserves + currency in circulation) by the amount of the purchase, in this case, $50 million. The increase in reserves allows the bank to make more loans, which increases the money supply by a multiple of the initial increase in reserves, known as the money multiplier. Therefore, the quantity of money will increase by more than $50 million.

Suppose the Federal Reserve Buys $50 Million Worth of Securities