If commercial banks increase their borrowing from the Fed at a time when the Fed is selling government securities, the borrowing of the commercial banks from the Fed will tend to:
A)reinforce the Fed's contractionary policy.
B)increase the unemployment rate in the country.
C)counteract the Fed's contractionary policy.
D)counteract the Fed's expansionary policy.
E)increase the credibility of the Fed.

Question

Quizplus · Accepted Answer

When commercial banks increase their borrowing from the Fed during a time when the Fed is selling government securities, this increases the money supply in the economy, counteracting the Fed's contractionary policy. Thus, the correct choice is C - counteract the Fed's contractionary policy.

If Commercial Banks Increase Their Borrowing from the Fed at a Time