When the Fed sells Treasury Bonds on the open market, it will tend to
A) decrease the money supply and raise interest rates.
B) decrease the money supply and lower interest rates.
C) increase the money supply and raise interest rates.
D) increase the money supply and lower interest rates.

Question

Quizplus · Accepted Answer

When the Fed sells Treasury Bonds on the open market, it decreases the money supply in the market. As a result, the demand for money increases and the interest rates rise due to the inverse relationship between interest rates and money supply. Lower money supply leads to an increase in the price of credit, hence increasing interest rates.

When the Fed Sells Treasury Bonds on the Open Market