If the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what will this tend to do to short-term security prices and interest rates?
A)Prices and interest rates will both rise.
B)Prices will rise and interest rates will decline.
C)Prices and interest rates will both decline.
D)Prices will decline and interest rates will rise.
E)There will be no changes in either prices or interest rates.

Question

Quizplus · Accepted Answer

When the Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, it increases the supply of Treasury securities in the market, which tends to lower the price of these securities due to the higher supply. As the price of the securities decreases, the yield or interest rate demanded by investors will increase to compensate for the lower price. Therefore, this action by the Federal Reserve will tend to decrease short-term security prices and increase interest rates.

If the Federal Reserve Sells $50 Billion of Short-Term U