Question

Which of the following is not expected if the Fed starts selling government bonds in the open market?

a) Decreased borrowing

b) An increase in inflationary pressures

c) Decreased lending activity

d) A contraction in the Circular Flow

Answer 1

If the Fed started to sell the securities in the market and that might be a contractionary monetary policy. When the Fed sells the securities in the market , it squeezes the money supply in the market. The decrease in the money supply increases the nominal interest rates in the economy, since the nominal interest rate is the cost of borrowing money the people reduces the level of borrowing. The decrease in the money supply also limit the lending activities. The decrease in momey supply decreases the level of investment and consumption expenditure and there by decreases ciricular flow.

Ans: b). An increase in inflationary pressures.