Explain what happens when the FED conducts an open-market purchase of $200 in bonds. How do the banks get involved? What is the ultimate effect on the level of high-powered money and on the money supply?

When the FED buys $200 in bonds, it is conducting an open-market purchase and the Fed receives the government security from the seller (individual or bank) and pays for them with high-powered money. In effect, the FED raises the account balance of the seller at the seller’s bank and the reserve balance at the Federal Reserve Bank. This increases the amount of high-powered money which through the money multiplier has an effect on money supply which also increases.