When the Fed Sells Bonds and Drains Reserves from the Banking

question 70

Multiple Choice

When the Fed sells bonds and drains reserves from the banking system, thereby reducing the supply of money, this policy will

• A) decrease short-term interest rates to a greater degree than long-term interest rates.
• B) decrease long-term interest rates to a greater degree than short-term interest rates.
• C) increase short-term interest rates to a greater degree than long-term interest rates.
• D) increase long-term interest rates to a greater degree than short-term interest rates.

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Definitions:

Laws of Economics

Fundamental principles that govern economic behavior and interactions, such as supply and demand, cost-benefit analysis, and incentives.

Interest-Rate Cost-Of-Funds

The cost to banks or financial institutions of acquiring funds to lend, which can include interest paid on deposits or on borrowed funds.

Marginal Benefit

Additional value or satisfaction obtained by consuming an extra unit of a good or service.

Utility-Maximizing Rule

A principle in economics that states individuals allocate their resources to maximize their utility or satisfaction.