Answer: Open market operations affect the quantity of banks' reserves. Suppose the Fed buys U.S. government securities. When the Fed buys government securities, banks' reserves increase. (These reserves rise whether the Fed buys securities from a bank or from a member of the public.) The rise in banks' reserves leads them to increase their lending, so the quantity of money increases.
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ReplyDeleteOpen market operations affect the quantity of banks' reserves. Suppose the Fed buys U.S. government securities. When the Fed buys government securities, banks' reserves increase. (These reserves rise whether the Fed buys securities from a bank or from a member of the public.) The rise in banks' reserves leads them to increase their lending, so the quantity of money increases.