A question asks, "If the federal funds rate were above the rate the Fed had targeted, the fed could move the rate back towards its target by _" and then the options are buying/selling bonds, and this would increase/decrease reserves. According to the answer sheet it says buying bonds, which would increase reserves. Why would that be?
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1 Answer
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Because Fed buys those bonds with newly created reserves not already existing money.
So when Fed wants to buy \$1000 bond it creates \$1000 worth of new reserves.
