The sale of government securities by the Federal Reserve (Fed) typically results in the money supply to decrease.
When the Fed sells government securities, it takes money out of the banking system, which reduces bank reserves. As a result, banks have less capacity to create loans, leading to a decrease in the overall money supply. Consequently, the other options do not accurately describe the effects of this action:
- Bank reserves will decrease, not increase.
- Demand deposits are likely to decrease because there is less money available to back them.
- The interest rate may increase as a result of tighter money supply conditions, rather than decrease.
Thus, the correct answer is the money supply to decrease.