Question

If the Fed sells treasury bonds, what happens? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a Financial institutions purchase the bonds, which injecting money into the system and the interest rate falls. b Financial institutions purchase the bonds, increasing their assets which allow them to lend more, reducing the interest rate. c Financial institutions purchase the bonds, which removes money from the system and the interest rate rises. d Financial institutions purchase the bonds, increasing their assets which allow them to lend more, increasing the interest rate.

Answer 1

Answer:

c Financial institutions purchase the bonds, which removes money from the system and the interest rate rises.

Explanation:

The Fed engages in various strategies to control the amount of money in the economy. On each strategy is the Open Market Operations (OMO) where the Fed regulates cash in circulation by selling or buying of securities.

When the Fed sells treasury bonds they want to mop up cash in the economy and reduce money supply.

As financial institutions purchase the bonds the level of liquidity or cash in the economy reduces.

This will push interest rates up as financial institutions have less cash to lend to customers.