Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Interest rates will increase, reducing aggregate demand.
B
Interest rates will decrease, boosting investment spending.
C
The money supply will increase, leading to higher inflation.
D
The price level will rise due to reduced government spending.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank sells government bonds in the open market, it takes money out of circulation. This happens because investors buy these bonds, which means they are using their cash to pay for them. As a result, there is less money available for people and businesses to spend, leading to a decrease in overall spending in the economy. For example, if a small business owner has less cash because they bought bonds, they might delay hiring new employees or expanding their shop. Overall, this action can lead to higher interest rates and slower economic growth in the short term.
Detailed Explanation
When a central bank sells bonds, it takes money out of the economy. Other options are incorrect because Some might think selling bonds lowers interest rates; It's a common mistake to think selling bonds increases the money supply.
Key Concepts
Open Market Operations
Interest Rates
Aggregate Demand
Topic
Open Market Operations
Difficulty
easy level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.