If the Fed sells U.S.government securities to drain reserves from banks,which of the following will probably occur?
A)The demand for money will increase and the interest rate will rise.
B)The money supply will increase and the interest rate will fall.
C)The interest rate will rise and the quantity of money demanded will fall.
D)The money supply will decrease and the interest rate will fall.
E)The interest rate will fall and the quantity of money demanded will increase.

Question

Quizplus · Accepted Answer

When the Fed sells U.S. government securities to drain reserves from banks, the reserves available with banks decrease. As a result, banks lend less, leading to a decrease in the money supply. In turn, the decrease in the money supply increases the demand for money, putting upward pressure on interest rates. Hence, the interest rate will rise and the quantity of money demanded will fall, making option C the correct choice.

If the Fed Sells U