The graph shown displays the relationship between money and the interest rate. The Fed could use open market operations to contract the economy from: A) M ^S1 to M ^S3. B) M ^S3 to M ^S4. C) M ^S4 to M ^S3. D) M ^S2 to M ^S3.

Question

Quizplus · Accepted Answer

Open market operations involve the buying and selling of government securities by the Federal Reserve. To contract the economy, the Fed would sell government securities, which reduces the money supply (shifts S1 to the left) and increases the interest rate (shifts P0 to P1). This is represented by the movement from M ^S4 to M ^S3. Therefore, the correct choice is C.

The Graph Shown Displays the Relationship Between Money and the Interest