Question

If a bank purchases a security from the Federal Reserve System, reserves in the banking system ________ and the monetary base ________, everything else held constant.

Answer 1

Purchase of a security by the bank will decrease the reserves in the banking and as a result the monetary base will also decrease.

Explanation:

The federal reserve system is the central bank of the United States of America. It has certain measures under it's control to manage the supply of money in the economy.

One of those measures is the purchase and the selling of the securities. If the security is purchased by the bank from the Federal reserve system, it will decrease the money reserve in the banks. As a result of this the monetary base will decrease in the country also.