Question

Suppose that the FED decides to sell bonds. What happens to the value of the US...

Suppose that the FED decides to sell bonds. What happens to the value of the US dollar? What happens to prices in the US?

Group of answer choices

The value of the US$ increase and prices in the US decrease.

The value of the US$ drops and prices in the US decrease.

The value of the US$ drops and prices in the US increase.

The value of the US$ increase and prices in the US increase.

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Answer #1

If the FED decides to sell bonds, then the money supply in the US would Decrease. Decrease in the US money supply would increase the rate of interest in the US.

Increase in the rate of interest in the US leads to massive capital inflow or Decrease in net vaoital outflow. This leads to an appreciation of the US dollar. Hence, Value of US Dollar Increases.

Moreover, With the Increase in the rate of interest, Investment Spending in the Economy Decreases which leads to Decrease in the Aggregate Demand. And due to an increase in the value of US dollar, the Exports of US Decrease and the imports Increase, leading to a Decrease in the Aggregate Demand. Thus, Aggregate Demand in the Economy Decrease. This leads to an increase in the prices in the US.

Therefore, If FED decides to sell bonds, then the value of US dollar Increases and prices in the US Decrease.

Hence, First Option is correct.

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