An article in the Wall Street Journal titled “Why the Fed’s Balance Sheet Is Shrinking,” observed that: “As people pay back their mortgages . . .the Fed’s holdings of mortgage backed securities shrink until it can use those funds to buy more.”

a. What are mortgage-backed securities? Where do they appear on the Fed’s balance sheet?

b. What does it mean to say that the Fed’s balance sheet is “shrinking”? Why would people paying off their mortgages cause the Fed’s balance sheet to shrink?