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

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if the Fed increases the money supply and the demand for money remains constant, there will be an excess supply of money. In order to get rid of this excess supply, individuals will seek to purchase other assets such as bonds, driving up the price of bonds and driving down the interest rate. Therefore, people will buy bonds, thus driving down the interest rate.

Assume a Fixed Demand for Money Curve and the Fed