If the FOMC orders the sale of T-bills in the open market, then bank reserves are
A)decreased, but the money supply will remain unchanged.
B)decreased, and a multiple contraction of the money supply will occur.
C)increased, but the money supply will remain unchanged.
D)increased, and a multiple expansion of the money supply will occur.

Question

Quizplus · Accepted Answer

When the FOMC orders the sale of T-bills in the open market, banks have to pay for the T-bills with their reserves, leading to a decrease in bank reserves. Since reserves are a multiple of the money supply, this decrease in reserves leads to a multiple contraction of the money supply. Therefore, choice B is correct.

If the FOMC Orders the Sale of T-Bills in the Open