1. How does an open market purchase affect the banking system’s balance sheet?

a. When the Fed purchases securities, it decreases the amount of reserves in the banking system.

b. When the Fed purchases securities, the amount of reserves in the banking system remains unchanged.c.

c. When the Fed purchases securities, it increases the amount of reserves in the banking system.

2. What is the intended impact on the supply of bank loans?

If the opportunity cost adjusted for risk (the difference between the interest rate on loans and the interest rate paid by the Fed on reserves) of holding excess reserves is too high for banks, they:

a. will increase the volume of loans they make.

b. will not change the volume of loans they make.

c. will decrease the volume of loans they make.