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Figure: The Money Supply and Aggregate Demand
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____.
A) buy; increase; lower; (a)
B) sell; decrease; raise; (b)
C) buy; decrease; raise; (b)
D) sell; increase; raise; (b)

Question

Use the following to answer questions:
Figure: The Money Supply and Aggregate Demand 
-(Figure: The Money Supply and Aggregate Demand) Refer to Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel _____.
A) buy; increase; lower; (a) 
B) sell; decrease; raise; (b) 
C) buy; decrease; raise; (b) 
D) sell; increase; raise; (b)

Quizplus · Accepted Answer

To combat an inflationary gap, the Federal Reserve sells Treasury bills, which decreases the money supply and raises interest rates, as depicted in panel (b). This action is intended to cool down the economy by making borrowing more expensive, thereby reducing spending and inflation.

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