The Fed sells $400 in bonds, half to the public and half to the banking system, which means the monetary base falls by _____ and the quantity of reserves falls by _____

Question

Quizplus · Accepted Answer

When the Fed sells bonds, it decreases the monetary base and the quantity of reserves in the banking system. Selling $400 in bonds reduces the monetary base by $400. However, since half of the bonds ($200 worth) are sold to the public and the other half to the banking system, the quantity of reserves directly falls by the $200 sold to the banking system.

The Fed Sells $400 in Bonds, Half to the Public