A sale of securities by the Fed causes

Question

Quizplus · Accepted Answer

When the Federal Reserve sells securities, it effectively removes money from the banking system because the purchasers of these securities pay the Fed, which reduces the reserves they hold at the Fed. This decrease in reserves means banks have less money to lend out, leading to a contraction in the money supply. Due to the fractional reserve banking system, this initial reduction in reserves can lead to a multiple contraction of the money supply, as it reduces banks' ability to create money through lending.

A Sale of Securities by the Fed Causes