If the Fed sells U.S.government securities in the open market,gross domestic product:
A)increases because the resulting increase in the interest rate leads to a decrease in investment.
B)increases because the resulting decrease in the interest rate leads to an increase in investment.
C)decreases because the resulting increase in the interest rate leads to a decrease in investment.
D)decreases because the resulting increase in the interest rate leads to an increase in investment.
E)decreases because the resulting decrease in the interest rate leads to an increase in investment.

Question

Quizplus · Accepted Answer

When the Fed sells U.S. government securities in the open market, the supply of money in the economy decreases, leading to an increase in the interest rate. As the interest rate increases, it becomes more expensive for firms to borrow money to invest in capital projects, resulting in a decrease in investment. As investment is a component of the GDP equation, a decrease in investment will cause a decrease in GDP.

If the Fed Sells U