For every dollar's worth of government securities the Fed sells,the money supply

Question

Quizplus · Accepted Answer

When the Federal Reserve sells government securities, it effectively removes money from the banking system because the purchasers of these securities pay the Fed, which reduces the amount of reserves banks have available. This decrease in reserves means banks have less money to lend out, leading to a multiplier effect where the total reduction in the money supply is more than the initial amount the Fed sold. Hence, the money supply falls by more than $1 for every dollar's worth of government securities sold.

For Every Dollar's Worth of Government Securities the Fed Sells,the