Suppose that the bond market and the money market both start out in equilibrium,then the Federal Reserve increases the money supply.The result will be a ______________ in the money market and a _________________ in the bond market,which will push bond prices _________________ and interest rates will ___________________ until a new equilibrium is reached.
A) surplus; shortage; up; fall
B) shortage; surplus; down; rise
C) surplus; shortage; down; rise
D) shortage; surplus; down; fall

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, there is a surplus of money in the money market. This leads to lower interest rates, making bonds less attractive initially, causing a shortage in the bond market as people hold onto cash or look for alternatives. As a result, bond prices are pushed up (since the price of bonds moves inversely to yields), and interest rates fall until a new equilibrium is reached.

Suppose That the Bond Market and the Money Market Both