Question

When the Fed sells government securities in the open​ market, the money supply​ ________ because​ ________. A. ​increases; banks lose​ liquidity, they make more loans and checking account deposits increase B. ​decreases; banks lose​ liquidity, they make fewer loans and checking account deposits decrease C. ​decreases; banks gain​ liquidity, they make fewer loans and checking account deposits decrease D. ​increases; banks gain​ liquidity, they make more loans and checking account deposits increase E. none of the above

Answer 1

Answer: Option (B) is correct.

Explanation:

Open market operations: In Open market operations, there is a buying and selling of government securities by the central bank of a nation. It is a monetary policy instrument that is used to control money supply in an economy.

If Fed sells the government securities in the open market then as a result there is a transfer of from public to Fed. So, there is a fall in the money supply because banks lose liquidity. Now, banks are able to make fewer loans to the borrowers and checking deposits also decreases.