Suppose the Fed sells a $50,000 U.S.Treasury security to Martha,a member of the public.If Martha writes a check to the Fed in order to buy this security,the money in her checking account will be transferred to
A) the Fed,and now the Fed will have $50,000 more in reserves than it had before.
B) her bank,and now her bank will have $50,000 more in reserves than it had before.
C) the Fed,and now it is as if the money doesn't exist.
D) the Treasury,and now the Treasury will have $50,000 more in reserves than it had before.

Question

Quizplus · Accepted Answer

When the Fed sells a U.S. Treasury security to a member of the public and receives payment via check, the money used to purchase the security is essentially removed from the money supply. This is because the funds are transferred to the Fed, and since the Fed is the central bank, not a commercial bank, these funds do not count as reserves in the banking system. Therefore, it's as if the money doesn't exist in the economy anymore, which can be a tool for reducing the money supply.

Suppose the Fed Sells a $50,000 U