If the Federal Reserve sells securities from its own portfolio to accommodate the request for securities made by a foreign central bank, then which of the following effects would ensure?
A) Securities held by the private sector will fall
B) Security prices are likely to rise
C) Bank reserves will rise
D) Bank reserves will fall
E) None of the above

Question

Quizplus · Accepted Answer

When the Federal Reserve sells securities from its portfolio, it effectively removes money from the banking system because the entities buying those securities pay with money that then leaves circulation. This action reduces the reserves that banks hold at the Fed, leading to a decrease in bank reserves.

If the Federal Reserve Sells Securities from Its Own Portfolio