Question

Select all that apply

When the Federal Reserve purchases bonds in the open market from the public, which of the following are elements of the transaction?
A. The seller gives up securities to the Federal Reserve Banks.
B. The bank experiences a decrease in its reserves.
C. The seller gets a payment check to deposit in its bank account.
D. The bank sends the check for collection.

Answer 1

The Federal Reserve's purchase of bonds increases a bank's reserves with the issuance of a payment check to the seller who relinquishes the securities. The bank sends the check for collection after the seller deposits it.

Step-by-step explanation:

When the Federal Reserve purchases bonds from the public, the transaction includes several key elements:

• The seller gives up the securities (bonds) to the Federal Reserve Banks, which is the initial action in the transaction.
• The seller receives a payment, typically by check, which they can then deposit into a bank account.
• Upon depositing the check in the seller's bank account, the bank will send the check for collection.

This transaction results in an increase in the banking system's reserves, as the Federal Reserve pays for these bonds by crediting the bank's reserve account. Consequently, the banking system now has more money available to lend, which can potentially lead to an expansion of the overall money supply. If the Federal Reserve was selling bonds instead, this would decrease a bank's reserves and potentially contract the money supply.