Starting from a​ short-run equilibrium, when the Fed decreases the quantity of​ money, _______. A. the quantity of unplanned reserves in the economy increases and banks make more loans B. people enter the loanable funds market and buy bonds C. banks conduct an open market operation and sell Treasury bills D. people enter the loanable funds market and sell bonds

Business · College · Tue Nov 03 2020

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When the Fed decreases the quantity of money from a short-run equilibrium, the correct option would be D. People enter the loanable funds market and sell bonds.

Explanation:

  • When the Fed reduces the quantity of money, it typically conducts open market operations where it sells Treasury securities (bonds) to reduce the money supply.
  • As the Fed sells bonds, people (investors or individuals) might respond by selling their bonds or securities to the market to obtain cash, which could be used for investment elsewhere or for other purposes.
  • Selling bonds in the loanable funds market can lead to a decrease in bond prices and an increase in interest rates, impacting investment decisions and potentially reducing the overall quantity of money in circulation.


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