If the fed buys u.s. government securities.

If the Fed buys U.S. government securities,

the interest rate will rise.
the money supply will eventually increase.
bank reserves will decrease.
the discount rate will rise.
When the Fed buys U.S. government securities from a bank, the Fed pays for the securities by
borrowing money from the U.S. Treasury.
decreasing the amount of money in circulation.
crediting the bank’s checking account at the Fed.
giving the bank gold.
The monetary expansion process from an open market operation can continue until
required reserves are eliminated.
lending has caused deposit liabilities to grow to the point where excess reserves = zero.
the discount rate is lower than market interest rates.
the Federal Reserve takes actions to stop the process.


1. Option B.
  • Fed uses expansionary monetary policy inorder to increase the money supply in the Economy.
  • When Fed purchases government securities from open markets the money supply and the inflation rate in the Economy Increases while the interest rates fall.
  • This will increase the amount of reserves held by banks and the loans lend by them to the public.
2. Option C.
  • While purchasing bonds from open markets, Fed must pay for those securities.
  • It must deposit the payment at at the bank which is maintained at Fed.
3. Option B.
  • The monetary expansion process from an open market operation can continue until the excess reserves are eliminated.
  • Which means that Fed can only conduct an expansionary monetary policy through an open market operation only until a point is reached were lending has led to zero excess reserves.

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