Florida Real Estate Practice Exam

What is the most likely effect when the Fed sells securities on the open market?

1. Banks will have more money to lend.

2. Interest rates will decrease.

3. The economy may grow due to an increased money supply.

4. The economy may slow down due to a decreased money supply.

The correct answer is: The economy may slow down due to a decreased money supply.

When the Fed sells securities on the open market, it means that the central bank is reducing the money supply in the economy. This means that there will be less money available for banks to lend, leading to a decrease in bank reserves and potentially higher interest rates. Additionally, a decrease in the money supply may cause the economy to slow down as businesses and consumers have less money to spend and invest. It is important for the central bank to carefully monitor and adjust the money supply to maintain a stable and healthy economy.