Everything else remaining unchanged,what will happen if the Fed sells government bonds in the open market and the value of borrowed reserves is zero?
A) It will cause the equilibrium federal funds rate to rise, but there will be no change in the equilibrium quantity of reserves.
B) It will cause the equilibrium federal funds rate to fall, but there will be no change in the equilibrium quantity of reserves.
C) It will cause the equilibrium federal funds rate to rise and the equilibrium quantity of reserves to fall.
D) It will cause both the equilibrium federal funds rate and the equilibrium quantity of reserves to fall.

Question

Quizplus · Accepted Answer

When the Fed sells government bonds in the open market, it reduces the amount of reserves banks have available. This decrease in reserves leads to a higher federal funds rate because banks have less money to lend to each other overnight. Additionally, the equilibrium quantity of reserves falls because the Fed's sale of bonds directly removes reserves from the banking system.

Everything Else Remaining Unchanged,what Will Happen If the Fed Sells