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5. a. The Federal Reserve carries out an open market purchase of Treasury securities. Why does...

5. a. The Federal Reserve carries out an open market purchase of Treasury securities. Why does this increase the reserves and deposits at banks?

b. The Federal Reserve carries out an open market sale of Treasury securities. Why does this decrease reserves and deposits at banks?

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a) An open market purchase means buying the bonds from the market and giving them money in return,with more money in hand, people will spend more and deposit more as they have an increased income in hand, with more money the saving and deposits In the bank will increase and they will need to hold more reserve.

b) a Sale mean the fed selling the bonds in the market and taking the money in return. It will decrease the money supply and reserve and deposits from the bank. With less income people will withdraw some money from the bank and that will decrease reserves and depostis.

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