Suppose the Federal Reserve sells Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells Treasury bills, it reduces the money supply as it takes money out of circulation. This decrease in the money supply leads to a reduction in Treasury bill prices as there is less demand for them. Lower demand leads to lower prices. Finally, as Treasury bills are a type of fixed-income security, their prices and interest rates are inversely related. Therefore, when Treasury bill prices go down, interest rates go up.

Suppose the Federal Reserve Sells Treasury Bills