Question

When the fed buys government bonds, the reserves of the banking system a. decrease, so the money supply increases. b. decrease, so the money supply decreases. c. increase, so the money supply increases. d. increase, so the money supply decreases?

Answer 1

When the fed buys government bonds, the reserves of the banking system c. increase, so the money supply increases. As money is moved around within the government due to the federal reserve buying government bonds, more money is readily available. As there is an increase in bonds being purchased, there is more access to money so the money supply within the economy also increases.

Answer 2

When the fed buys government bonds, the reserves of the banking system :C. increase so the money supply increases

when the feds buys government bonds, the money will be transferred to citizens who sell the bond. This citizens will put some of the money in the banks which will increase the reserve in banking system and will spend some of it to buy products which will increase the money supply