Asked by Apiwe Xozwa on Jun 27, 2024
Verified
If the Fed sells government bonds on the open market,which of the following is likely to occur?
A) The money supply will expand.
B) The market rate of interest on government bonds will increase.
C) The market rate of interest on corporate bonds will decrease.
D) The amount of investment spending will increase.
Government Bonds
Debt securities issued by a government to support government spending and obligations, typically offering a fixed rate of return over a specified period.
Market Rate
The market rate refers to the prevailing interest rate available in the marketplace for financial products or the current price of goods and services in a competitive market.
- Examine the impact of purchasing and liquidating government bonds on monetary circulation and interest levels.
Verified Answer
RG
Regina GivensJun 29, 2024
Final Answer :
B
Explanation :
When the Fed sells government bonds on the open market, it reduces the supply of available government bonds, which drives up their market price and decreases their yield. Since bond prices and interest rates are inversely related, the market rate of interest on these government bonds will increase as a result.
Learning Objectives
- Examine the impact of purchasing and liquidating government bonds on monetary circulation and interest levels.