Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases interest rates, leading to lower aggregate demand.
B
It decreases the money supply, thus reducing spending and investment.
C
It stabilizes the economy by automatically increasing price levels.
D
It encourages banks to lend more by increasing their reserves.
Understanding the Answer
Let's break down why this is correct
Answer
When a Central Bank decides to sell government bonds, it is trying to control the amount of money in the economy. When these bonds are sold, people and banks buy them, which means they are using their cash to purchase the bonds. This reduces the amount of money available in the economy because the cash goes to the Central Bank. With less money circulating, interest rates may go up, making it more expensive to borrow money. For example, if a person wants to take out a loan to buy a car, they might find that the interest rate is higher because there is less money available, which could lead them to delay their purchase.
Detailed Explanation
When the Central Bank sells government bonds, it takes money out of the economy. Other options are incorrect because This answer suggests that selling bonds directly reduces the money supply; This option says selling bonds stabilizes the economy by raising prices.
Key Concepts
Open Market Operations
Monetary Policy
Aggregate Demand
Topic
Open Market Operations
Difficulty
hard level question
Cognitive Level
understand
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