Suppose the Fed decreases the money supply.In response households and firms will ________ short term assets and this will drive ________ interest rates.

Question

Quizplus · Accepted Answer

If the Fed decreases the money supply, households and firms will sell their short-term assets such as Treasury bills, certificates of deposits, and commercial papers. This will increase the demand for money and decrease the supply of money in the market, which will drive up interest rates. Thus, Option C is the correct answer. Options A and B are incorrect because buying short-term assets will increase their price and decrease their yield, which is opposite to what happens when the money supply decreases. Option D is also incorrect because selling short-term assets will increase their yield and decrease their price, which is not consistent with a decrease in the money supply.

Suppose the Fed Decreases the Money Supply