When the Fed conducts an open market operation by purchasing securities from a bank, .
A) the bank's deposits increase but its reserves do not change
B) the bank's reserves increase
C) public holdings of securities increase
D) the bank's deposits increase but its reserves decrease

Question

Quizplus · Accepted Answer

When the Fed purchases securities from a bank, the bank's reserves increase. This is because the Fed pays for the securities by crediting the bank's reserve account at the Fed. The bank's deposits also increase, but this has no effect on reserves.

When the Fed Conducts an Open Market Operation by Purchasing