Question

If the Fed engages in an open market sale with a bond dealer, the bond dealer's bank's transactions deposits liabilities will ________ and the money supply will ________.

a) increase; decrease
b) increase; increase
c) decrease; decrease
d) decrease; increase

Answer 1

The correct answer is option c.

Step-by-step explanation:

If the Federal bank sells securities to a bond dealer, the dealer will need to pay back the Fed. This will cause a reduction in the dealer's bank's transaction deposits liabilities.

A reduction in deposits liabilities will further cause a reduction in the total reserves of the bank. Consequently, it will cause a decrease in the money supply. In this way, the federal reserve bank can curb inflationary pressures.