What is the effect of the central bank selling treasury bills?

• A. Reduces credit availability
• B. Increases credit availability
• C. No effect on credit
• D. Increases inflation

Answer: (A)

Selling treasury bills is a contractionary monetary policy move that drains liquidity from the banking system. When the central bank sells these securities, buyers pay with their bank deposits, which reduces reserves held by banks at the central bank. With fewer reserves, banks have less capacity to create new loans, and lending becomes more expensive as interest rates rise. The result is that credit availability in the economy falls. This is the intended effect to cool demand and curb inflation; it does not increase credit or leave credit unchanged, and it tends to dampen price pressures rather than boost them.