A sale of securities by the Fed causes: a

Economics Jan 28, 2021

A sale of securities by the Fed causes:

a. a contraction of the money supply equal to the amount of the securities sold.

b. an expansion of the money supply equal to the amount of the securities sold.

c. a multiple expansion of the money supply greater than the amount of the securities sold.

d. a multiple contraction of the money supply greater than the amount of the securities sold.

Expert Solution

The correct option is d. A multiple contractions of the money supply greater than the amount of the securities sold.

When the Fed sells the securities then it receives money in return from commercial banks and investors. However, this contractionary policy will have multiple effects on the level of money supply in the economy. As a result, the amount of the contraction of the money supply would become greater than the value of the securities sold.

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