When the Federal Reserve sells a government security to a commercial bank the cash reserves of:

a. The commercial bank decrease,

b. The net worth of the commercial bank increases,

c. The loans of the commercial bank will increase,

d. The balance sheet of the commercial bank is thrown off balance.

• The correct answer is a. The commercial bank decrease.

The Open Market Operations (OMO) are a monetary policy tool used by the Federal Reserve to control the money supply in the economy. The Federal Reserve buys or sells government securities (usually short-term U.S. Treasury securities) to commercial banks in order to influence on their cash reserves. The government will sell government securities when it wants to decrease the money supply. With this action, commercial banks will buy these securities and as a consequence, their ability to lend money to the customers will be reduced. On the other hand, when the Federal Reserve wants to increase the money supply will buy government securities which increase the liquidity in the market. Open Market Operations are one of the main 4 tools used by the Federal Reserve. Therefore, the correct answer is option a.