When a primary dealer sells a bond to the Fed, reserves and the monetary base:

Question

BlackTom AI · Accepted Answer

Open-market purchase by the Fed increases bank reserves and the monetary base because the Fed pays for the bond by creating reserves.

1. Relevant knowledge points and concepts
- Open-market operations: when the Fed buys government bonds from primary dealers, it injects payment into the banking system.  
- Bank reserves: deposits that commercial banks hold at the Fed.  
- Monetary base (high-powered money): equals currency in circulation + reserves held by banks at the Fed. A Fed asset purchase increases Fed liabilities (reserves), raising the monetary base.

2. Step-by-step reasoning
- A primary dealer sells a Treasury bond to the Fed.  
- The Fed pays by crediting the dealer’s bank account at the Fed (increasing that bank’s reserve balance).  
- The dealer receives a deposit at its commercial bank (or transfers funds), but the key effect is the Fed creates reserves and credits them to the banking system.  
- Because reserves are a component of the monetary base, the monetary base rises by the same amount as the reserve injection.

3. Simple numerical illustration
- Suppose the Fed buys $100 million of bonds.  
- Fed balance sheet: +$100m Treasuries (asset), +$100m reserves (liability).  
- A commercial bank’s reserves rise by $100m. Monetary base increases by $100m (increase in reserves; currency unchanged in this transaction).

4. Why the correct answer is correct
- The Fed’s purchase directly increases reserves (a Fed liability) and therefore raises the monetary base. This is the textbook result of an open-market purchase.

5. Why the other options are incorrect
- b (increase; decrease): impossible because reserves and the monetary base move together here; reserves rising cannot make the base fall.  
- c (decrease; decrease) and d (decrease; increase): a dealer sale to the Fed is an injection, not a withdrawal, so reserves do not decline.

Conclusion: Reserves increase and the monetary base increases, which matches answer a.

When a primary dealer sells a bond to the Fed, reserves and the monetary base:单项选择题

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