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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About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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