Question

Suppose that businesses and consumers get much more optimistic about the future of the economy. To...

Suppose that businesses and consumers get much more optimistic about the future of the economy. To stabilize output the Federal Reserve could

a. buy bonds to raise interest rates.

b. buy bonds to lower interest rates.

c. sell bonds to raise interest rates.

d. sell bonds to lower interest rates.

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Answer #1

Answer: c. sell bonds to raise interest rates

Businesses and consumers get much more optimistic about the future of the economy. if this is the case then FED needs to follow contractionary monetary policy. It can either raise discount rate and reserve requirements to increase the interest rate or it can sell bonds in open market operations.

If FED sells bonds then it decreases the money supply which leads to a higer interest rate. and objevtive of contractionary monetary policy has been achieved.

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