Final answer:
When the Federal Reserve buys a U.S. government bond from a member of the public, it increases the banking system's reserves and the money supply tends to grow.
Step-by-step explanation:
If the Federal Reserve buys a U.S. government bond from a member of the public, the correct option is B: the banking system has more reserves and the money supply tends to grow.
When the central bank, which is the Federal Reserve in the United States, purchases bonds, it pays for these bonds with money that it creates.
This money is then deposited into the banks where the individuals or entities who sold the bonds have their accounts. As a result, the reserves of the banks increase because they now have more money in their reserves.
This action, in turn, enables banks to issue more loans, effectively increasing the overall money supply within the economy.
By contrast, when the central bank sells bonds, it is taking money out of circulation, as money flows from the individual banks' reserves into the central bank, resulting in a decrease in the money supply.
The process of the central bank buying securities to increase the money supply is known as an open market operation, which is a key tool used in conducting monetary policy.