If the Federal Reserve sells bonds, the short-run effects will be
A) an increase in the money supply and lower real interest rates.
B) a decrease in the money supply and lower real interest rates.
C) an increase in the money supply and higher real interest rates.
D) a decrease in the money supply and higher real interest rates.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells bonds, it means they are removing money from circulation, which leads to a decrease in the money supply. This decrease in the money supply leads to higher interest rates in the short run as people compete for the limited available funds. Thus, the real interest rates will be higher.

If the Federal Reserve Sells Bonds, the Short-Run Effects Will