When the Federal Reserve sells a government security to a bond dealer, which transmits payment from a transactions deposit account at a bank

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When the Federal Reserve sells a government security to a bond dealer and receives payment from a transactions deposit account at a bank, the bank's reserves decrease because the payment reduces the deposits at the bank. This reduction in reserves can lead to a decrease in the bank's ability to lend, which in turn reduces the money supply. The sale of government securities by the Federal Reserve is a tool used to conduct contractionary monetary policy, aimed at decreasing the money supply.

When the Federal Reserve Sells a Government Security to a Bond