If commercial banks are increasing their borrowing from the Fed while the Fed is selling government securities, the borrowing of the commercial banks from the Fed will tend to:

Question

Quizplus · Accepted Answer

When the Fed sells government securities, it is conducting a contractionary open market operation, which aims to decrease the money supply by taking money out of circulation. If commercial banks are increasing their borrowing from the Fed at the same time, they are obtaining additional reserves, which can counteract the effect of the contractionary policy by potentially increasing the money supply.

If Commercial Banks Are Increasing Their Borrowing from the Fed