Question

If the Federal Reserve buys $40,000 worth of securities from the non-bank public, and the non-bank public then deposits the payment in their bank account, what happens next?

a)R increases by $40,000 and the MB rises by $40,000

b)C and R both increase by $40,000, and MB increases by $80,000

c)C increases by $40,000 and the MB increases by $40,000

d)C decreases by $40,000 and the MB increases by $40,000

Answer 1

Answer:

If the Federal Reserve buys $40,000 worth of securities from the non-bank public, and the non-bank public then deposits the payment in their bank account, then:

(a): R increases by $40,000 and the MB rises by $40,000

option (a) is correct

Explanation:

If the Federal Reserve Bank buys $40,000 worth of securities from the non‐bank public, and the public then deposits the payment in their bank account,

then

reserves rise by $40,000 because people have deposited all of it in the bank and haven't spend any of it anywhere else.

currency in circulation rises by 0 because multiplier will not work when there is no further credit creation.

so what ever they have deposited its laying there creating no extra money.

and so,

the MB rises by $40,000 because of the deposit that has been made by the people.