Question

Suppose the Fed conducts $10 million open market purchase from Bank A. If Bank A and all the other banks use reserves to purchase only securities, what will happen to deposits in the banking system and how much does it expand

Answer 1

The deposits in the banking system will increase. It will expand by $10 million.(1)

Explanation:

The open market purchase from Bank A by the Fed will increase the money supply which in turn will lead to increase to deposits in the banking system .The Fed uses money to carry out the open market purchase thus giving more money to Bank A during the purchase ,this will increase the money in circulation in the economy hence increase in the deposits that the banks have in the economy bearing in mind that the banks only uses the reserves to purchase securities.