Which of the following choices accurately describes what happens when the Fed sells bonds?

Question

Multiple select question.

Money is taken out of circulation when people pay for the bonds.

Equilibrium bond prices go down.

The supply of bonds will go down.

The money supply will increase.

Equilibrium interest rates on bonds go up.

Answer 1

When the Federal Reserve (Fed) sells bonds, the following choices accurately describe what happens:

1. Money is taken out of circulation when people pay for the bonds. - True. When the Fed sells bonds, buyers pay for them, which reduces the amount of money in circulation.

2. Equilibrium bond prices go down. - True. When the Fed sells bonds, it increases the supply of bonds in the market, which can lead to a decrease in bond prices.

3. The supply of bonds will go down. - False. The supply of bonds increases when the Fed sells them, not decreases.

4. The money supply will increase. - False. The money supply actually decreases when the Fed sells bonds, as money paid for the bonds is effectively removed from circulation.

5. Equilibrium interest rates on bonds go up. - True. When bond prices fall (due to increased supply), the yield (interest rate) on those bonds rises, leading to higher equilibrium interest rates.

So, the accurate choices based on what happens when the Fed sells bonds are:

• Money is taken out of circulation when people pay for the bonds.
• Equilibrium bond prices go down.
• Equilibrium interest rates on bonds go up.