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Figure: The Money Supply and Aggregate Demand
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel _____ illustrates what happens when the Fed decides to _____ Treasury bills and _____ the money supply.
A) (a); sell; increase
B) (b); buy; increase
C) (b); sell; decrease
D) (a); buy; decrease

Question

Use the following to answer questions:
Figure: The Money Supply and Aggregate Demand 
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. Panel _____ illustrates what happens when the Fed decides to _____ Treasury bills and _____ the money supply.
A) (a); sell; increase 
B) (b); buy; increase 
C) (b); sell; decrease 
D) (a); buy; decrease

Quizplus · Accepted Answer

When the Fed sells Treasury bills, it decreases the money supply. This is because Treasury bills are a type of government debt that is sold to investors. When the Fed sells Treasury bills, it is essentially borrowing money from investors. This reduces the amount of money in circulation, which in turn reduces aggregate demand.

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