question archive If the Federal Reserve buys $40,000 worth of securities from the non-bank public, and the non-bank public then deposits the payment in their bank account, what happens next? a
If the Federal Reserve buys $40,000 worth of securities from the non-bank public, and the non-bank public then deposits the payment in their bank account, what happens next? a
Subject:EconomicsPrice:2.88 Bought3
If the Federal Reserve buys $40,000 worth of securities from the non-bank public, and the non-bank public then deposits the payment in their bank account, what happens next?
a. R increases by $40,000 and the MB rises by $40,000.
b. C and R both increase by $40,000, and MB increases by $80,000.
c. C increases by $40,000 and the MB increases by $40,000.
d. C decreases by $40,000 and the MB increases by $40,000.
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The answer is c).
We can think about this in two steps. When the Fed purchases securities from the non-bank public, the non-bank public gets $40,000 of cash. In this case, the asset and liabilities of the Fed both increases by $40,000. The amount of cash in circulation increases by $40,000.
There is no change to reserve of the banking system. Since monetary base (MB) is the sum of notes in circulation (cash) and reserve, monetary base thus increases by $40,000.
