Figure 14.1 -Refer to Figure 14.1.Suppose the Federal Reserve _______ bonds in the open market.The money supply will decrease and cause a shift from ______. A) Buys;AD₁ to AD₂ B) Buys;AS₂ to AS₃ C) Sells;AD₂ to AD₁ D) Sells;AS₂ to AS₃

Question

Quizplus · Accepted Answer

If the Federal Reserve sells bonds in the open market, money supply decreases. This is because when the Federal Reserve sells bonds, banks will have less reserves to lend out, and therefore, reduce the amount of money in circulation. As a result, this will cause a shift from AD₂ to AD₁. Choice A and B are incorrect because buying bonds will increase the money supply, not decrease it. Choice D is incorrect because selling bonds will decrease the money supply, not increase it.

Figure 14.1 -Refer to Figure 14.1.Suppose the Federal Reserve _______ Bonds in _______

Figure 14.1 -Refer to Figure 14.1.Suppose the Federal Reserve _ Bonds in _