An open market sale by the Federal Reserve ______ the monetary base and ______ the size of the Fed's balance sheet.

Question

BlackTom AI · Accepted Answer

Question restatement: The scenario asks what happens to the monetary base and the size of the Fed's balance sheet when the Federal Reserve conducts an open market sale.
Option A: decreases, decreases. This option aligns with the mechanics of an open market sale: the Fed sells securities to the public, which reduces the Fed's securities holdings (assets) and drains reserves from the banking system (part of the monetary base). Since reserves are a major component of the monetary base, the base falls, and with fewer assets on its books, the Fed's overall balance sheet also shrinks.
Option B: decreases, does not change. The sale reduces not only the monetary base but also the Fed's assets and liabilities. The balance sheet changes in size because both assets (securities) and a portion of the monetary base (reserves) are reduced, so this option incorrectly asserts the balance sheet size remains unchanged.
Option C: decreases, increases. It is incorrect to claim the monetary base decreases while the Fed’s balance sheet increases; selling securities removes assets from the Fed, not adds them, and the balance sheet should contract, not expand.
Option D: increases, decreases. An open market sale does not increase the monetary base; it withdraws reserves from banks, reducing the base. Therefore this option conflicts with the fundamental effect of the operation.
Option E: increases, does not change. This option incorrectly suggests an expansion of the monetary base; in reality, selling securities reduces reserves and the base, not increases it, and the balance sheet would reflect a reduction as well.
Option F: increases, increases. Both the monetary base and the balance sheet size would rise only if the Fed were buying securities or engaging in expansionary actions, not when selling securities. This makes F inconsistent with an open market sale.
Conclusion note: The correct conceptual outcome of an open market sale is a contraction of both the monetary base and the Fed’s balance sheet, so Option A accurately describes the effect, while all other options misstate one or both aspects of the impact.

2025Fall-ECN3615-01 Final Exam Practice Quiz

An open market sale by the Federal Reserve the monetary base and the size of the Fed's balance sheet.

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