If the Fed sells bonds and, thereby, unexpectedly shifts to a more restrictive monetary policy, in the short run, the primary impact of this policy will tend to
A) increase inflation.
B) reduce unemployment.
C) increase real output.
D) increase real interest rates.

Question

Quizplus · Accepted Answer

If the Fed sells bonds and shifts to a more restrictive monetary policy, the money supply in the economy will decrease. This will increase the demand for money relative to its supply, leading to an increase in the interest rate. An increase in real interest rates will make borrowing more expensive for firms and households, reducing investment spending and consumption, and leading to a decrease in aggregate demand, output, and employment in the short run. It is unlikely to affect inflation in the short run, as the output gap will increase, and the inflationary pressure will ease.

If the Fed Sells Bonds And, Thereby, Unexpectedly Shifts to a More