When the Fed sells government securities, it: a-decreases the amount of excess r

Question

When the Fed sells government securities, it:

   a-decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
   b-increases the amount of excess reserves that banks hold, encouraging them to make loans to the general public.
   c-increases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.
   d-raises the cost of borrowing from the Fed, discouraging banks from making loans to the general public.
   e-lowers the cost of borrowing from the Fed, encouraging banks to make loans to the general public.

Explanation / Answer

Correct Choice - a-decreases the amount of excess reserves that banks hold, discouraging them from making loans to the general public.

The banks would use their excess reserves to purchase the securities, thus crowding out the funds for general public and private enterprises

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