Question

The Fed buys bonds in the open market and pays for the bonds by transmitting funds to the bond dealer's deposit account in a bank, at which point it becomes part of the money supply. The Fed has just created money, because it has added to the reserve account of the bond dealer's bank, and the money supply increases by the amount of the purchase.

Please add more to my response above. Be more specific. Question: 4) Explain how the Fed increases the money supply when it buys bonds in the open market.

Answer 1

When the Fed buys bonds in the market the banks who have sold it receives those funds in the market and that increases the reserve of those bank, this reduce the federal fund rate and at a lower federal fund rate the interest rate in the market falls,at a lower interest rate the lending of the banks increase and that increases the money supply,

those funds that the bank has lended might end up in other banks deposits and will be again lend by that bank, this is how the money supply in the market increases by the money multiplier apart from what is mentioned abvoe.