Assume a fixed demand for money curve and the RBA decreases the money supply. In response, people will:
A) sell bonds, thus driving up the interest rate.
B) sell bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) buy bonds, thus driving down the interest rate.

Question

Quizplus · Accepted Answer

When the Reserve Bank of Australia (RBA) decreases the money supply, people will sell bonds to increase their holdings of money. This selling pressure increases the supply of bonds in the market, leading to a decrease in bond prices. Since bond prices and interest rates move inversely, the interest rates will rise.

Assume a Fixed Demand for Money Curve and the RBA