Question

Suppose that when the Fed decreases the money​ supply, households and firms initially hold less money than they want​ to, relative to other financial assets. As a​ result, households and firms will​ _________ Treasury bills and other financial​ assets, thereby​ _________ their​ prices, and​ _________ their interest rates. A. ​sell; decreasing; increasing B. ​sell; increasing; decreasing C. ​buy; increasing; decreasing D. ​buy; decreasing; decreasing

Answer 1

Answer:

The correct answer is A

Explanation:

When Fed decreases the money supply in the market, then there prevails the shortage of the money at the prevailing rate of interest. So, the interest rate need to be increased in order to dissuade people from holding the money. Therefore, the households and the firms will sell the treasury bills and other kind of financial assets by decreasing the prices and which lead to increase in the interest rate.