If the FOMC orders the open market desk to sell government securities,

A. the money supply will decrease , and the interest rate will increase.

B. the money supply will increase , and the interest rate will increase.

C. the money supply will increase , and the interest rate will decrease.

D. the money supply will decrease , and the the interest rate will decrease.

Question

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18 April, 11:27

If the FOMC orders the open market desk to sell government securities,

A. the money supply will decrease , and the interest rate will increase.

B. the money supply will increase , and the interest rate will increase.

C. the money supply will increase , and the interest rate will decrease.

D. the money supply will decrease , and the the interest rate will decrease.

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Answers (1)

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Cristina Nunez · Answer 1

Answer: Option (a) is correct.

Explanation:

FOMC (Fed open market committee) is monetary policy making body of United states who implements various money supply related policy.

Here, FOMC orders the open market desk to sell government securities, which lowers the money supply and increases the interest rate.

Fed use this monetary policy instrument to control the money supply in the economy.

This effect also shown in a diagram.

In the IS-LM diagram, it was shown that there is a shift in the LM curve leftwards due to decrease in the money supply. So, this decrease in the money supply raises the interest rate from i to i' and decreases output from Y to Y'.