When the Fed sells bonds, the Fed:
A)reduces the reserves and the federal funds rate increases.
B)increases the reserves and the federal funds rate decreases.
C)reduces the reserves and the federal funds rate decreases.
D)increases the reserves and the federal funds rate increases.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells bonds, it effectively removes money from the banking system, which decreases the reserves that banks hold. With fewer reserves, banks have less money to lend out, which can lead to an increase in the federal funds rate as the supply of available funds decreases.

When the Fed Sells Bonds, the Fed