In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.
A) buy; rises; increase
B) sell; falls; decrease
C) sell; rises; decrease
D) buy; rises; decrease

Question

Quizplus · Accepted Answer

When the Federal Reserve decreases the money supply, people sell bonds to get liquidity, which increases the interest rate. Higher interest rates lead to a decrease in investment and income.

In the IS-LM Model When the Federal Reserve Decreases the Money