Question:
What will happen to the money supply and the equilibrium interest rate if the Central Bank sells securities in the open market?
(1) Money Supply: Increase / Int Rate: Increase
(2) Decrease / Increase
(3) Increase / Decrease
(4) Decrease / Decrease
(5) Decrease / No change
Correct Answer:
(2)
Answer Explanation:
When the Central Bank sells government securities, commercial banks and the public buy them using their cash reserves. This sucks liquidity out of the banking system, decreasing the money supply. A lower supply of money makes borrowing scarcer, which drives the equilibrium interest rate up.
Topic: Monetary Policy Year: 2017
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