Question

When the Fed buys securities from a bank, a sequence of events begins. The events are listed below.

Number each event in the order in which it occurs.
A)
1. Bank's reserves increase
2. Money supply decreases
3. Interest rates rise
4. Bank's lending capacity decreases
B)
1. Bank's reserves decrease
2. Money supply increases
3. Interest rates rise
4. Bank's lending capacity increases
C)
1. Bank's reserves increase
2. Money supply increases
3. Interest rates fall
4. Bank's lending capacity increases
D)
1. Bank's reserves decrease
2. Money supply decreases
3. Interest rates fall
4. Bank's lending capacity decreases

Answer 1

The correct sequence of events after the Fed buys securities from a bank is that the bank's reserves and money supply increase, interest rates fall, and the bank's lending capacity increases. The final answer is option C.

Step-by-step explanation:

When the Federal Reserve (the Fed) buys securities from a bank, we can expect a specific sequence of events affecting the banking system and the economy.

1. The bank's reserves increase because the Fed pays the bank for the securities, placing money into the bank's reserve account.
2. The money supply increases, as the bank now has extra reserves to back new loans and the currency paid by the Fed circulates in the economy.
3. Interest rates fall because with more money available, the price of borrowing—that is, the interest rate—tends to go down due to lesser scarcity of funds.
4. The bank's lending capacity increases because increased reserves mean the bank can issue more loans.

Therefore, the correct sequence starting with the Fed buying securities from a bank is: Bank's reserves increase, money supply increases, interest rates fall, and bank's lending capacity increases. The final answer to the sequence question is C.