If there are no changes in inflation expectations,a sale of government bonds by the Fed in the open market will cause ________.
A) both the federal funds rate and the long-term expected real interest rate to rise
B) both the federal funds rate and the long-term expected real interest rate to fall
C) the federal funds rate to rise and the long-term expected real interest rate to fall
D) the federal funds rate to fall and the long-term expected real interest rate to rise

Question

Quizplus · Accepted Answer

When the Fed sells government bonds in the open market, it reduces the reserves of the banking system, leading to an increase in the federal funds rate. Since there are no changes in inflation expectations, the real interest rate is also expected to rise, reflecting tighter monetary conditions.

If There Are No Changes in Inflation Expectations,a Sale of Government