An open market sale of government securities by the Fed will cause which of the following?

Question

Quizplus · Accepted Answer

Open market sale of government securities by the Fed leads to a decrease in reserves in the banking system, causing an increase in the federal funds rate. Thus, option A is correct. Option B is incorrect because the equilibrium quantity of reserves decreases when the Fed sells government securities. Option C is incorrect because only option A is correct, not option B. Option D is incorrect because the sale of government securities by the Fed has an impact on the economy, and hence it cannot have no effect as in option D.

An Open Market Sale of Government Securities by the Fed