How does the an open market purchse by the Fed affect the level of the bank reserves and the interest rate?

Question

How does the an open market purchse by the Fed affect the level of the bank reserves and the interest rate?

Answer 1

An open market purchase by the Fed will either increase or decrease the money supply, because they are either buying or selling bonds.  With an increased money supply, the interest rate will drop.  With a decrease money supply, the interest rate will rise.  The way that the Fed affects bank reserves is by changing the reserve requirement, a tool that they almost never use becasue it can cause great confusion in banking.  With a decreased or increased money supply however, the bank reserves would probably either decrease or increase.  Hope this helps.