When the fed sells government securities in the open market, the money supply because a. increases; banks lose liquidity, they make more loans and checking account deposits increase b. decreases; banks lose liquidity, they make fewer loans and checking account deposits decrease c. decreases; banks gain liquidity, they make fewer loans and checking account deposits decrease d. increases; banks gain liquidity, they make more loans and checking account deposits increase e. none of the above

Option (B) is correct.

Explanation:

Open market operations: In Open market operations, there is a buying and selling of government securities by the central bank of a nation. It is a monetary policy instrument that is used to control money supply in an economy.

If Fed sells the government securities in the open market then as a result there is a transfer of from public to Fed. So, there is a fall in the money supply because banks lose liquidity. Now, banks are able to make fewer loans to the borrowers and checking deposits also decreases.

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