When the Fed sells U.S. government securities to a bank, the Fed

Question

Quizplus · Accepted Answer

When the Fed sells U.S. government securities to a bank, it takes money out of the bank's reserves, decreasing the monetary base. This, in turn, raises the federal funds rate, making it more expensive for banks to borrow from each other. Therefore, B is the correct answer. A is incorrect because selling securities to a bank decreases the bank's reserves at the Fed. C is incorrect because the Fed keeps the money from the sale of securities, and D is incorrect because the Fed does not loan banks money to purchase securities.

When the Fed Sells U