When the Fed sells government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.

Question

Quizplus · Accepted Answer

When the Fed sells government securities, banks' reserves decrease as they buy the securities and give the Fed their reserves in exchange. The decrease in reserves leads to a decrease in the quantity of money in circulation because banks have less money to lend. As the availability of funds for lending decreases, the federal funds rate (the interest rate banks charge each other for overnight loans) rises. Thus, B is the correct answer.

When the Fed Sells Government Securities, Banks' Reserves ________, the Quantity