In the short run, when the Fed decreases the quantity of money
A) bond prices fall and the interest rate rises.
B) bond prices rise and the interest rate falls.
C) the demand for money increases.
D) the supply of money curve shifts rightward.

Question

Quizplus · Accepted Answer

When the Fed decreases the quantity of money, it reduces the supply of money in the economy. This leads to higher interest rates because there is less money available for borrowing. Higher interest rates make bonds less attractive, causing their prices to fall, as the fixed payments from bonds are now less appealing compared to the higher interest that can be earned elsewhere.

In the Short Run, When the Fed Decreases the Quantity