Assume the Fed decreases the money supply and the demand for money curve is fixed. In response, people will:
A) sell bonds, thus driving up the interest rate.
B) buy bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) sell bonds, thus driving down the interest rate.

Question

Quizplus · Accepted Answer

When the Fed decreases the money supply with a fixed demand for money, people will sell bonds to obtain more liquidity. This selling pressure increases the supply of bonds in the market, leading to a decrease in bond prices. Since bond prices and interest rates are inversely related, the interest rates will go up as a result.

Assume the Fed Decreases the Money Supply and the Demand