When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by the Fed. This activity initiated by the FOMC's policy directive is referredto as a ____ of money supply growth.
A) increase; loosening
B) decrease; loosening
C) increase; tightening
D) decrease; tightening
E) none of the above

Question

Quizplus · Accepted Answer

When the Fed sells securities, it takes cash out of the banking system, decreasing the total funds of commercial banks. This action reduces the reserves of banks, making it more difficult for them to lend money and decreasing the money supply, which is known as a tightening of money supply growth. Therefore, the correct option is D, which states that the total funds of commercial banks decrease, and it is referred to as a tightening of money supply growth.

When the Fed Sells Securities, the Total Funds of Commercial