When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A. increase by more than $100. B. decrease by $100. C. decrease by more than $100. D. increase by $100.

Question

Ronan Farrell

Business

27 April, 04:57

When the Fed buys $100 worth of bonds from a primary dealer, reserves in the banking system A. increase by more than $100. B. decrease by $100. C. decrease by more than $100. D. increase by $100.

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Answers (1)

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Gauge Burke · Answer 1

The correct answer is D.

Explanation:

The fed buys $100 worth of bonds from a primary dealer. The fed will pay the dealer for these bonds. This will cause an increase in the total reserves by $100. The money supply will increase by more than $100. The extent of increase in the money supply depends on the required reserve ratio. This is an example of an expansionary monetary policy.