When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply of money, this policy will
A) decrease short-term interest rates to a greater degree than long-term interest rates.
B) decrease long-term interest rates to a greater degree than short-term interest rates.
C) increase short-term interest rates to a greater degree than long-term interest rates.
D) increase long-term interest rates to a greater degree than short-term interest rates.

Question

Quizplus · Accepted Answer

When the Fed sells bonds, it reduces the money supply, leading to higher short-term interest rates as banks have less money to lend.

When the Fed Sells Bonds and Drains Reserves from the Banking