Question

When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by the Fed. This activity initiated by the FOMC's policy directive is referred to as a(n) ____ of money supply growth.

Answer 1

Answer:

The correct answer is decrease; tightening.

Explanation:

If the FED reduces the money supply, it can cause interest rates to rise and credit conditions to tighten. If there is no change in the demand for money, the effect of reducing the money supply is said to lead to higher interest rates. For its part, another effect is to decrease the volume of loans made.