When the Fed sells $100 million of securities to a commercial bank,the
A)monetary base increases.
B)money supply increases.
C)bank's reserves decrease.
D)required reserve ratio decreases.
E)bank's reserves do not change.

Question

Quizplus · Accepted Answer

When the Fed sells securities to a commercial bank, the bank's reserves decrease. This is because the bank is paying for the securities, which means it is losing some of its reserves (in this case, $100 million worth). The monetary base may or may not change, depending on whether the bank's reserves were part of the monetary base or not. The money supply may or may not change, depending on whether the bank uses the remaining reserves to make loans or not. The required reserve ratio does not change as a result of this transaction.

When the Fed Sells $100 Million of Securities to a Commercial