If the Fed sells a T-bill to a commercial bank, how will this affect the money supply?
A)It will increase the money supply.
B)It will increase bank reserves.
C)It will decrease the money supply.
D)It will have no effect on the money supply.

Question

Quizplus · Accepted Answer

When the Fed sells a T-bill to a commercial bank, it is essentially taking money out of circulation and giving the bank a government security instead. This decreases the amount of money available in the system, since the bank cannot use the security as a means to pay for goods and services. Therefore, this action will decrease the money supply.

If the Fed Sells a T-Bill to a Commercial Bank