When the Fed sells government securities in the open market,the money supply ________ because ________.
A)decreases;banks lose liquidity,they make fewer loans and checking account deposits decrease
B)increases;banks gain liquidity,they make more loans and checking account deposits increase
C)increases;banks lose liquidity,they make more loans and checking account deposits increase
D)decreases;banks gain liquidity,they make fewer loans and checking account deposits decrease
E)none of the above

Question

Quizplus · Accepted Answer

When the Fed sells government securities in the open market, it decreases the amount of reserves that banks have, leading to a decrease in the money supply. Banks lose liquidity because they have fewer reserves to lend out, which leads to a decrease in loans and checking account deposits.

When the Fed Sells Government Securities in the Open Market,the