When the Fed sells government bonds in the open market:
A) the monetary base increases and interest rates decrease.
B) the monetary base decreases and interest rates increase.
C) both the monetary base and interest rates decrease.
D) both the monetary base and interest rates increase.

Question

Quizplus · Accepted Answer

When the Fed sells government bonds in the open market, it decreases the supply of reserves in the banking system, causing the monetary base to decrease. This, in turn, leads to an increase in interest rates, as banks have less reserves to lend out and must increase the cost of borrowing to compensate for this. Therefore, option B is correct.

When the Fed Sells Government Bonds in the Open Market