The Federal Reserve bought Treasury bonds and mortgage-backed securities during three rounds of quantitative easing following the financial crisis. Chair Janet Yellen said the Fed will soon start the process of selling the $4.5 trillion in bonds on its balance sheet. Shrinking the Fed’s balance sheet will impact markets in a similar way to a rise in the interest rate.

a. What would the U.S. Federal Reserve do to shrink its balance sheet?

b. How would the monetary base change, and how would bank reserves change?