Question

The federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to sell government bonds, the quantity of reserves in the banking:__________

Answer 1

Answer: decreases

Explanation: The following practice is done by the central bank in the situation of inflation when there is an excess supply of money in the economy.

The central bank tries to decrease the funds by selling the govt bonds to the banks. This results in decrease in funds from banks as they have to buy such bonds from their respective funds.