Question

When the fed sells a u.s. bond in the open market, select one:

a. total reserves do not change but the money supply increases.
b. total reserves do not change but the money supply decreases.
c. total reserves will decrease.
d. total reserves will increase.

Answer 1

When the Federal Reserve sells U.S. bonds, it removes money from the banking system, leading to a decrease in total reserves and the money supply.

Step-by-step explanation:

When the Federal Reserve (the central bank in the U.S.) sells a U.S. bond in the open market, it takes money out of the banking system. This action will decrease the total reserves in the banking system because money that would have been in banks' reserves is used to buy the bonds from the Fed. Therefore, the money supply in the economy also decreases because there are fewer reserves available for banks to create new loans. The correct answer to the question is that when the Fed sells a U.S. bond in the open market, total reserves will decrease, and consequently, the money supply decreases as well.