When the Federal Reserve sells $100 worth of government securities, bank reserves

Question

Quizplus · Accepted Answer

When the Federal Reserve sells government securities, it is essentially withdrawing money from the banking system. As a result, bank reserves would decrease by the exact amount of the sale, which in this case is $100. Option A and B are incorrect because they suggest that reserves would increase, which is the opposite of what happens when securities are sold. Option D is also incorrect because the deposit expansion multiplier doesn't directly affect bank reserves, but rather determines the overall increase or decrease in the money supply as a result of changes in reserves.

When the Federal Reserve Sells $100 Worth of Government Securities