An open-market sale of T-bonds by the Fed causes the money supply to
A)fall and bond prices to fall.
B)rise and bond prices to fall.
C)rise and bond prices to rise.
D)fall and bond prices to rise.

Question

Quizplus · Accepted Answer

An open-market sale of T-bonds by the Fed means that the Fed is selling government bonds to investors. This means that the investors will have to pay for the bonds, and so their cash balances will fall. As a result, the money supply in the economy will fall. Additionally, since the Fed is selling bonds, the supply of bonds in the market will increase, which will lead to a decrease in bond prices.

An Open-Market Sale of T-Bonds by the Fed Causes the Money