Answer: c. selling bonds. This selling would reduce reserves.
Explanation:
If the Fed sold bonds, they would be taking money out of the system as people would buy the bonds and pay the Fed. When this happens, the reserves of money in banks reduces.
This leads to a situation where there will be less cash to loan out. This reduction in the supply of loanable funds will result in interest rates rising to reflect that loanable funds are now more scarce thereby pushing the federal funds rate back up to the level targeted.
