Question

Suppose the Federal Reserve is presently holding $4.2 trillion in U.S. Treasury bonds. If the Fed decides to sell $1 billion of these bonds to the public, we can expect reserves in the banking system to _____________ and we can expect the money supply to _____________.

Group of answer choices

increase : increase

decrease : decrease

increase : decrease

decrease : increase

Answer 1

When the Federal Reserve sells Treasury bonds to the public, the public will purchase these bonds and they have to withdraw their deposits from the banks to make payments for the purchase. This will reduce the reserve of commercial banks. As bank reserves decreases less credits are available to the economy. Thus total money supply in the economy decreases.

b. decrease, decrease.