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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question

Use the following to answer questions .
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply 
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point b, the Federal Reserve can close the output gap by selling bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates. 
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates. 
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates. 
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Quizplus · Accepted Answer

If the Federal Reserve sells bonds, this increases the supply of bonds in the market, leading to a shift in the supply curve to the right. This excess supply of bonds will drive down bond prices and increase interest rates to help close the output gap.

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