Suppose that banks decide to hold fewer excess reserves relative to deposits.Other things the same,this action will cause the
A)money supply to fall.To reduce the impact of this the Fed could sell Treasury bonds.
B)money supply to fall.To reduce the impact of this the Fed could buy Treasury bonds.
C)money supply to rise.To reduce the impact of this the Fed could sell Treasury bonds.
D)money supply to rise.To reduce the impact of this the Fed could buy Treasury bonds.

Question

Quizplus · Accepted Answer

When banks hold fewer excess reserves, they can lend more, increasing the money supply. To counteract this increase, the Fed could sell Treasury bonds, which would decrease the money supply by taking money out of circulation.

Suppose That Banks Decide to Hold Fewer Excess Reserves Relative