Problem:

Suppose, as part of an active monetary policy, the Federal Reserve sells government and other securities from its existing portfolio holdings to the banking and financial sectors and the non-bank public. Suppose also that the banking sector is fully "loaned up," meaning that it is holding no excess reserves. Trace through the expected consequences of this secondary market action on the banking system - reserves, loan able and investable funds, and deposits; financial markets - bond and stock prices, and interest rates; inflationary pressures; credit-sensitive spending; and the general state of the economy as measured by real GDP (or real income) and unemployment.

Under what circumstances would the Federal Reserve do this? Please provide step by step solution and show all work.