What kind of Fed activity is likely to be evident when the Fed desires to drain reserves out of the banking system and underscore a policy move toward restraint?
A)No Fed buying or selling is likely to occur.
B)The Fed is likely to use reverse repurchase agreements.
C)The Fed is likely to engage in system repurchase agreements.
D)The Fed is likely to engage in outright sales.

Question

Quizplus · Accepted Answer

When the Fed desires to drain reserves out of the banking system and underscore a policy move toward restraint, it is likely to engage in outright sales. This involves selling securities in the open market, which reduces the amount of reserves available in the banking system and ultimately causes interest rates to rise. Reverse repurchase agreements and system repurchase agreements are typically used by the Fed to inject reserves into the banking system, so they would not be utilized in this scenario.

What Kind of Fed Activity Is Likely to Be Evident