What happens to the money supply, interest rates, and the economy if the Federal Reserve is...

What happens to the money supply, interest rates, and the economy if the Federal Reserve is a net seller of government bonds? What happens to the money supply, interest rates, and the economy if the Federal Reserve is a net buyer of government bonds.

Expert Solution

a) If the Fed is selling the bonds in the market, that will lead to a decrease in the monetary supply in the market and that will shift the Money supply curve to the left, keeping the money demand the same, the interest rate in the market will increase and the economic activity will decrease due to a lower investment in the market.

if the Fed is buying the bonds in the market that will increase the money supply in the market and shift the money supply curve to the right, it will lower the interest rate in the market and increase the investment leading to an increase in the economic activity.

Rahul Sunny answered 2 years ago

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