When the Fed buys a Treasury bill from the public, how does it usually pay for the T-bill?
A)by writing a check on a commercial bank account
B)by printing new Federal Reserve notes
C)by creating new reserves in bank accounts
D)by prepaying taxes into the Treasury's account

Question

When the Fed buys a Treasury bill from the public, how does it usually pay for the T-bill?
A)by writing a check on a commercial bank account 
B)by printing new Federal Reserve notes 
C)by creating new reserves in bank accounts 
D)by prepaying taxes into the Treasury's account

Quizplus · Accepted Answer

When the Fed buys a Treasury bill from the public, it usually pays for it by creating new reserves in bank accounts, which is an electronic transaction where the Fed credits the bank's reserve account with the amount of the purchase. This increases the total amount of reserves in the banking system. The seller of the T-bill, typically a financial institution or individual, can then use these reserves to lend or invest.

When the Fed Buys a Treasury Bill from the Public