When the Fed buys bonds through open market operations, it gives banks money in return, which:
A) increases their ability to lend, and increases aggregate demand.
B) decreases their ability to lend, and increases aggregate demand.
C) increases their ability to lend, and decreases aggregate demand.
D) decreases their ability to lend, and decreases aggregate demand.

Question

Quizplus · Accepted Answer

When the Fed buys bonds through open market operations, it injects money into the banking system. This increases the banks' reserves and therefore their ability to lend. With more money available to loan, banks are likely to lower interest rates, making borrowing more attractive to consumers and businesses. This increased spending leads to an increase in aggregate demand.

When the Fed Buys Bonds Through Open Market Operations, It