Suppose that the bond market and the money market both start out in equilibrium,then the Federal Reserve decreases 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.

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the money supply, there is a shortage in the money market because there is less money available for lending. In the bond market, this leads to a surplus of bonds as investors sell off bonds to obtain liquidity, pushing bond prices down. As bond prices fall, interest rates rise until a new equilibrium is reached.

Suppose That the Bond Market and the Money Market Both