Question

The purchase of $1 million of Treasury securities by the Federal Reserve, if there is a change in the quantity of currency, will cause reserves at banks to ____.

1) increase
2) decrease
3) remain the same

Answer 1

When the Federal Reserve purchases Treasury securities, it causes reserves at banks to increase.

Step-by-step explanation:

When the Federal Reserve purchases $1 million of Treasury securities and there is a change in the quantity of currency, it will cause reserves at banks to increase. This is because the purchase of Treasury securities injects money into the banking system, increasing the amount of reserves banks hold. When banks have more reserves, they can lend out more money, which can stimulate economic activity.