When the Fed buys government bonds, the reserves of the banking system
A)increase, so the money supply increases.
B)increase, so the money supply decreases.
C)decrease, so the money supply increases.
D)decrease, so the money supply decreases.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys government bonds, it pays for these bonds by adding credit to the banks' reserves, which increases the reserves of the banking system. This increase in reserves allows banks to lend more, thereby increasing the money supply.

When the Fed Buys Government Bonds, the Reserves of the Banking