Student Question

How does the Fed create money to purchase T-bills and how is this new money moved into the economy?

I understand that the primary way the Fed increases money supply is by purchasing T-bills. 

Expert Answers

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The way that the Federal Reserve creates the money and the way that it puts it into the economy are one and the same thing.

The Federal Reserve simply creates the money by putting it into a bank account.  There are no pre-existing funds from which the transferred money is drawn.  The Fed has the right to authorize new money for purchasing T-bills.  The Fed has the right to create money in this way.  It does not have to get the money from anywhere.  It just creates it.  The Fed then inserts the money into the economy through a normal electronic transaction.  The money is then in the bank’s account.  Once the money is in the bank’s account, it has been moved into the economy.  The bank will, of course, lend it out and increase the money supply in that way, but the initial action of putting the money into the economy is achieved simply by transferring money that the Fed has created to a bank’s account.

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