Question

In the money market, if the interest rate exceeds the equilibrium interest rate, there is a surplus of money. How is the surplus eliminated?

A.

The high interest rate increases the demand for money, eliminating the surplus.

B.

People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.

C.

Banks will lend out the surplus, lowering interest rates.

D.

The Federal Reserve will destroy currency, reducing the quantity of money.

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When the Fed sells government securities to a bank, how are the Fed's assets affected?

A.

The amount of reserves held at the Fed decreases.

B.

The amount of reserves held at the Fed increases.

C.

The amount of the Fed's government securities decreases.

D.

The amount of the Fed's government securities increases.

Answer 1

Q1
Answer
Option B
People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down
The money market has a surplus, so there is a lower quantity of money demanded than the supplied and that supply pressure decreases the interest rate because People buy bonds to rid themselves of the surplus money, bidding up their price and pushing interest rates down.
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Q2
Answer
Option c
The amount of the Fed's government securities decreases.
Sell of securities sends the securities to the public and it can be traded in the securities market, and it is decreased from the Feds balance sheet.