When a central bank sells government securities in the open market, the immediate effect is generally to
Correct answer: B. Reduce bank reserves and lending capacity
- A. Increase bank reserves and lending
- B. Reduce bank reserves and lending capacity
- C. Lower taxes and raise disposable income
- D. Increase exports through currency depreciation
Explanation
An open market sale withdraws money from the banking system, reducing commercial-bank reserves and their capacity to create deposits. The resulting monetary tightening can also place upward pressure on interest rates.
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