Question

When the federal reserve purchases a government bonds from banks, reserves in the banking system ________ and the monetary base ________, everything else held constant.

Answer 1

When the federal reserve buys government bonds from banks, the monetary base and banking system reserves both increases while keeping all other factors constant.

The Federal Reserve, sometimes known as the Fed, is the most influential economic organization in the United States and maybe the whole world. Its primary duties include controlling the money supply, determining interest rates, and overseeing the financial markets.

In exchange for monthly interest payments, a bondholder lends money to a business or the government for a predetermined period of time. When the bond matures, the bond's issuer pays the investor its money back.

The Fed will buy bonds from banks to increase the amount of cash available, which will provide funds to the banking sector. The Fed will remove capital from the banking system by selling bonds to banks in order to reduce the amount of money in circulation.

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