When the fed buys $100 worth of bonds from a primary dealer, reserves in the banking system a. increase by more than $100. b. decrease by $100. c. decrease by more than $100. d. increase by $100.

The correct answer is D.

Explanation:

The fed buys $100 worth of bonds from a primary dealer. The fed will pay the dealer for these bonds. This will cause an increase in the total reserves by $100. The money supply will increase by more than $100. The extent of increase in the money supply depends on the required reserve ratio. This is an example of an expansionary monetary policy.

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