Question

Suppose that banks decide to hold fewer excess reserves relative to deposits. Other things the same, this action will cause the

Answer 1

c. money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds.

Step-by-step explanation:

Since in the question it is given that the bank has decided to hold fewer reserves that contain excess reserves as compared to deposits so for this they have to borrowed the amount or the saving amount should be invested

This results in declining in interest rate which causes the money supply risen also the demand and the investment for the nation has risen that develop the inflation but for declining the inflation the FED has to sell the bonds so that it comes at equilibrium point again