When the money market is drawn with the value of money on the vertical axis,if the Fed sells bonds then
A)the money supply and the price level increase.
B)the money supply and the price level decrease.
C)the money supply increases and the price level decreases.
D)the money supply increases and the price level increases.

Question

Quizplus · Accepted Answer

When the Fed sells bonds, it decreases the reserves held by banks, which in turn decreases the money supply. This leads to a decrease in the demand for goods and services, causing a decrease in the price level. Therefore, the correct option is B, i.e., the money supply and the price level decrease.

When the Money Market Is Drawn with the Value of Money