Suppose the Central Bank sells Government securities to banks. What effect would that have on interest rates and inflation?
A) Prices and interest rates would both rise.
B) Prices would rise and interest rates would decline.
C) Prices and interest rates would both decline.
D) There would be no changes in either prices or interest rates.
E) Prices would decline and interest rates would rise.

Question

Quizplus · Accepted Answer

When the Central Bank sells Government securities to banks, it decreases the amount of money available for lending. This causes an increase in demand for loans, which in turn leads to an increase in interest rates. Additionally, the decrease in the money supply can lead to a decrease in prices, or deflation. Therefore, prices would decline and interest rates would rise.

Suppose the Central Bank Sells Government Securities to Banks