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Posted 9 months ago
What happens when a central bank buys bonds?
Choose 1 answer:
(A) The demand for money decreases.
(B) Excess reserves increase.
(C) Excess reserves decrease.
(D) The interest rate increases.
(E) The money supply decreases.
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Answer from Sia
Posted 9 months ago
Solution by Steps
step 1
When a central bank buys bonds, it injects money into the banking system by paying for these bonds
step 2
This action increases the reserves of the banks because they receive the payment for the bonds
step 3
With increased reserves, banks have more money to lend, which increases the money supply in the economy
step 4
As a result of increased money supply, the interest rates typically decrease because there is more money available for borrowing
B
Key Concept
Excess Reserves Increase
Explanation
When a central bank buys bonds, it increases the reserves of the banks, leading to an increase in excess reserves.
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