A sale of bonds by the Fed generates

Question

Quizplus · Accepted Answer

A sale of bonds by the Fed increases the supply of bonds in the market, which leads to a decrease in bond prices. As bond prices decrease, the interest rates on the bonds increase, which increases the interest rate in the economy. As interest rates rise, the demand for money balances decreases as people and businesses have an increased incentive to save money in bonds rather than holding onto cash. Therefore, option D is the correct choice. Option A is incorrect as the demand for money balances decreases, not increases. Option B is incorrect for the same reason as option A. Option C is incorrect as a sale of bonds by the Fed leads to an increase in the supply of bonds, which drives down their prices, not increases their demand.

A Sale of Bonds by the Fed Generates