If the Fed sells government bonds to the public, then reserves a. Increase and the money supply increases. b. Increase and the money supply decreases. c. Decrease and the money supply increases. d. Decrease and the money supply decreases.
Business · High School · Mon Jan 18 2021
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When the Federal Reserve (the Fed) sells government bonds to the public, it leads to a decrease in reserves held by banks.
The correct answer is: d. Decrease and the money supply decreases.
When the Fed sells government bonds, it collects funds from the public in exchange for the bonds. This action reduces the reserves of the banking system because the funds used to purchase the bonds move out of bank reserves and into the hands of the public. As a result, the money supply decreases as banks have fewer reserves available to create new loans and deposits.