Final answer:
A central bank purchasing government bonds increases liquidity by injecting money into the banking system, which raises money supply. If banks do not lend out these excess reserves, the broader economy does not receive these funds, but banks become more liquid.
Step-by-step explanation:
If the central banks buy government bonds from individuals on the open market and banks do not loan out any excess reserves, the potential consequence of this action would be increased liquidity. This occurs because when a central bank purchases bonds, it transfers money to the banks in exchange for these bonds, thus increasing the money supply in the economy. Although the central bank injects money into the banking system, if the banks choose not to lend out their excess reserves, this money does not reach the broader economy via loans, something that typically stimulates economic activity. Instead, it increases the liquidity of the banks as they hold more cash reserves. This is contrary to a scenario where the central bank sells bonds, which would result in money flowing from individual banks to the central bank, thereby reducing the money supply.