If the Fed wishes to reduce aggregate demand, it will conduct an open market

Question

Quizplus · Accepted Answer

When the Fed wishes to reduce aggregate demand, it will conduct an open market sale. This means that the Fed will sell government securities in the open market. This will decrease the money supply and increase interest rates. As a result, people will reduce their spending, and borrowing will decrease, reducing aggregate demand. The sale of government securities will increase their supply, which will lower their price and raise their yield, i.e., interest rates. This will discourage investment and reduce aggregate demand. Thus, Choice C is the correct answer because it correctly states that the open market sale will lower bond prices, raise interest rates, and discourage investment.

If the Fed Wishes to Reduce Aggregate Demand, It Will