Suppose that the Fed makes a $100 billion open-market sale of Treasury bonds, and the money multiplier is 6. Which of the following impacts are most likely to result?
A) The money supply shifts inward, and the equilibrium interest rate rises in the money market.
B) The money supply shifts outward, and the equilibrium interest rate falls in the money market.
C) Investment declines, causing the aggregate demand curve to shift leftward, reducing equilibrium real GDP and thus slowing the economy.
D) Both a. and c. are correct.
E) Both b. and c. above are correct.

Question

Quizplus · Accepted Answer

The open-market sale of Treasury bonds reduces the monetary base, which in turn reduces the money supply. The decrease in the money supply shifts the money supply curve inward, leading to a higher equilibrium interest rate. The higher interest rate discourages investment, causing the aggregate demand curve to shift leftward. The leftward shift in the aggregate demand curve reduces equilibrium real GDP, slowing down the economy.

Suppose That the Fed Makes a $100 Billion Open-Market Sale