Question

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.

Answer 1

The correct answer is D.

Step-by-step 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.