Suppose the U.S. Treasury is confronted with a budget surplus and chooses to retire debt previously issued. According to your text, several effects are likely to occur if the retired debt was held by the Federal Reserve banks. Which effect below is not likely to happen in this case?

Question

Quizplus · Accepted Answer

Retiring debt held by the Federal Reserve would lead to a decrease in the nation's money supply and total reserves of depository institutions, which could cause total spending in the economy to decline. However, this process would not necessarily cause interest rates to rise; in fact, it could lead to lower interest rates due to the reduced supply of money and spending.