Discussion
Through open market operations, the Federal Reserve buys and sells government securities to influence the supply of bank reserves. When the Fed wants to increase reserves, it does what?
Answer: A
Correct answer: Buys Securities
To increase bank reserves the Federal Reserve buys government securities. It pays for them by crediting the sellers' bank accounts, so new reserves enter the banking system and banks can support more lending.
Selling securities does the reverse, draining reserves as buyers pay for the paper. The mechanism is the same as the RBI's open market operations, and it is the everyday tool of liquidity management in both systems because it acts quickly and can be applied in fine gradations.
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