Question

When the Fed sells government securities to​ banks, the sale

A. creates more excess reserves.

B. decreases​ banks' reserves.

C. increases​ banks' reserves

D. increases the monetary base.

E. increases the quantity of money.

Answer 1

Option B.

• When the Fed sells government securities to banks, the sale decreases banks reserves.
• The Fed sells the government securities when it needs to discourage the money lending by banks and decrease the amount of reserves held by the banks.
• This will decrease the amount of reserves in the banks and the banks reduce their lending to the general public.
• When the money lending or supply decreases, the inflation also falls which further increases the interest rates in the Economy.