Which of the following sequence of events follows an open market sale by the Fed?
A) r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
B) r↑ ⇒ I↑ ⇒ AE↓ ⇒ Y↑
C) r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D) r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↓

Question

Quizplus · Accepted Answer

An open market sale by the Fed leads to a decrease in the money supply, which causes interest rates to increase (r↑). Higher interest rates result in a decrease in investment (I↓) since it becomes more expensive for businesses to borrow money. This decrease in investment leads to a decrease in aggregate expenditure (AE↓) since investment is a component of aggregate expenditure. Finally, a decrease in aggregate expenditure leads to a decrease in output (Y↓) and income in the short run. Therefore, the correct sequence of events is A: r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓.

Which of the Following Sequence of Events Follows an Open