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When a primary dealer sells a government bond to the Federal Reserve, reserves in the banking...

When a primary dealer sells a government bond to the Federal Reserve, reserves in the banking system ________ and the monetary base ________, everything else held constant. increase; decreases increase; increases decrease; decreases decrease; increases

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Answer #1

Correct option is: Decreases, Decreases.

Sale of government bonds in open market decreases the supply of reserves, which decreases money supply. This is a contractionary monetary policy tool.

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