Money Creation and Monetary Policy Money Creation and Monetary Policy 1. Explain how a Fed sale of bonds will impact on the banking system, money creation, and the macro economy. Answers to Money Creation and Monetary Policy 1. Because banks earn profits by loaning money and purchasing government bonds.
Reserves generate no interest earnings.
Reducing the money supply has NO impact on aggregate supply. The sale of bonds will reduce ER and therefore restrict the banking system's ability to make loans.