If the Fed sells government securities, in the short run the nominal interest rate ________ and the real interest rate ________.
A) rises; rises
B) does not change; rises
C) falls; falls
D) rises; does not change
E) rises; falls

Question

Quizplus · Accepted Answer

When the Fed sells government securities, it decreases the money supply, leading to higher nominal interest rates. In the short run, the real interest rate also rises as it is closely tied to the nominal rate and inflation expectations do not adjust immediately.

If the Fed Sells Government Securities, in the Short Run