Banks in Richland charge an interest rate of 4% for overnight loans to each other. How will this rate change if the central bank of Richland engages in open market operations to purchase bonds?

What will be an ideal response?

If the central bank of Richland purchases government bonds from other banks, the quantity of bank reserves deposited at the Fed will increase. This will lower the interest rate that banks charge each other for overnight loans. This will enable banks to make more loans.