Asked by Hailey Gallant on May 07, 2024
Verified
Sales of government securities to banks ____ total and excess reserves and ____ the money supply.
A) increase;decrease
B) decrease;increase
C) decrease;decrease
D) increase;increase
Government Securities
Financial instruments issued by the government to finance its expenditures, promising to pay back with interest.
Excess Reserves
Capital reserves held by banks that surpass the minimum reserve requirements, providing liquidity and stability to the banking system.
Money Supply
The total quantity of monetary assets available in an economy at a specific time, including notes, coins, and balances held in checking and savings accounts.
- Recognize the significance of open market operations in shaping the economy.
- Understand the relationship between bond prices, interest rates, and monetary policy actions.
Verified Answer
WA
william arthurMay 09, 2024
Final Answer :
C
Explanation :
Sales of government securities to banks by the central bank (such as the Federal Reserve in the United States) decrease both total and excess reserves in the banking system because banks pay for these securities with their reserves. This action reduces the amount of money banks have available to lend, which in turn decreases the money supply.
Learning Objectives
- Recognize the significance of open market operations in shaping the economy.
- Understand the relationship between bond prices, interest rates, and monetary policy actions.