A decrease in the money supply might indicate that the Fed had
A)purchased bonds in an attempt to increase the federal funds rate.
B)purchased bonds in an attempt to reduce the federal funds rate.
C)sold bonds in an attempt to increase the federal funds rate.
D)sold bonds in an attempt to reduce the federal funds rate.

Question

Quizplus · Accepted Answer

When the Fed sells bonds, it decreases the money supply as it takes money out of circulation. This usually leads to an increase in the federal funds rate, as the decrease in the supply of money makes it more expensive to borrow. Therefore, a decrease in the money supply usually indicates that the Fed has sold bonds in an attempt to increase the federal funds rate.

A Decrease in the Money Supply Might Indicate That the Fed