In the context of open market operations, when inflation is a concern, the Fed sells securities to buyers who write checks to the Fed to pay for securities they bought, and the Fed withdraws these funds from banks. With fewer funds, _____.
A) credit becomes tighter
B) banks increase the number of loans they make
C) banks offer subprime mortgage loans
D) the inflationary pressures in the economy heat up

Question

Quizplus · Accepted Answer

Selling securities reduces the reserves in the banking system, leading to tighter credit conditions as banks have fewer funds to lend.

In the Context of Open Market Operations, When Inflation Is