Figure 11-5
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question

Figure 11-5 
-Refer to Figure 11-5. If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates. 
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates. 
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates. 
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Quizplus · Accepted Answer

Selling bonds by the Federal Reserve will increase the supply of bonds, which will shift the supply curve to the right in the bond market. This will lead to a decrease in bond prices (as there are more bonds available), and an increase in interest rates (because bond yields are inversely related to bond prices). This will reduce investment and consumption expenditures, thereby reducing the overall output level and closing the output gap.

Figure 11-5 -Refer to Figure 11-5. If the Economy Is at Point