question archive When the Fed buys government Securities in the open market (a) bank reserves increase (b) bank reserves decline (c) money supply increases but bank reserves remain unchanged (d) money supply declines but bank reserves remain unchanged
When the Fed buys government Securities in the open market (a) bank reserves increase (b) bank reserves decline (c) money supply increases but bank reserves remain unchanged (d) money supply declines but bank reserves remain unchanged
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When the Fed buys government Securities in the open market
(a) bank reserves increase
(b) bank reserves decline
(c) money supply increases but bank reserves remain unchanged
(d) money supply declines but bank reserves remain unchanged
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c. money supply increases but bank reserves remain unchanged
Reason: When the central bank undertakes purchasing of government securities under open market operations, it infuses liquidity in the economy. This leads to increase in the money supply in the economy. The bank reserves on the other hand changes when the central bank change the reserve requirement rates for the banks. In this case, Fed's purchase of government securities from the market will not alter the amount of bank reserves.
