When the Fed purchases securities, the total funds of commercial banks ____ by the market value of the securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.
A)increase; loosening
B)decrease; tightening
C)decrease; loosening
D)increase; tightening
E)None of these are correct.

Question

When the Fed purchases securities, the total funds of commercial banks ____ by the market value of  the securities purchased by the Fed. This activity initiated by the FOMC's policy directive is referred to as a ____ of money supply growth.
A)increase; loosening
B)decrease; tightening
C)decrease; loosening
D)increase; tightening
E)None of these are correct.

Quizplus · Accepted Answer

When the Federal Reserve (Fed) purchases securities, it pays for these securities by adding the amount to the reserves of the banks. This increases the total funds of commercial banks. This action is part of an expansionary monetary policy, often referred to as "loosening," because it increases the money supply by making more funds available for banks to lend.

When the Fed Purchases Securities, the Total Funds of Commercial