The initial impact of the Fed's open market sale of government securities to banks is
A) an increase in the quantity of money by some multiple of the dollar volume of the sale.
B) an increase in bank deposits at the Fed.
C) a decrease in the quantity of money by some multiple of the dollar volume of the sale.
D) a decrease of the banking system's reserve deposits at the Fed.

Question

Quizplus · Accepted Answer

When the Fed sells government securities, banks pay for these securities, which decreases their reserve deposits at the Fed. This reduces the amount of reserves banks have available to lend, leading to a contraction in the money supply.

The Initial Impact of the Fed's Open Market Sale of Government