Question

Which best explains why the money supply is increased when the Fed buys T-bonds on the open market? The purchase of bonds reduces the available supply of bonds, which drives up bond prices. The purchase of bonds increases the amount of deposits in people's bank accounts, which enables banks to loan more money. The purchase of bonds leads to a reduction in the discount rate, which provides banks with an incentive to loan more money. The purchase of bonds increases the demand both for bonds purchases and for money in general.

Answer 1

The purchase of bonds increases the amount of deposits in people's bank accounts, which enables banks to loan more money.

Step-by-step explanation:

APEX

Answer 2

The purchase of bonds increases the amount of deposits in people's bank accounts, which enables banks to loan more money.

Step-by-step explanation:

When the Federal Reserve buys treasury bonds, it deposits money to the sellers' amounts. The current bondholder gives up the bond and gets money in exchange. The Federal Reserve becomes the new bondholder.

The action of buying treasury bonds increases money in individuals accounts and, consequently, an increase in deposits. An increase in deposits means the bank will have more money to lend out to firms and households. The banks will reduce interest rates to encourage borrowing, which increases the money supply in the economy.