Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Decrease in money supply leading to higher interest rates
B
Increase in consumer spending due to lower interest rates
C
Increase in bank reserves encouraging more loans
D
Immediate rise in inflation due to excess money in circulation
Understanding the Answer
Let's break down why this is correct
Answer
When the central bank sells government bonds, it takes money out of the economy. People and businesses buy these bonds with cash, which means they have less money to spend on goods and services. This can lead to a decrease in overall spending, making it harder for the economy to grow. For example, if a company has less cash because it bought bonds, it might delay hiring new workers or buying new equipment. As a result, the immediate effect is often a slowdown in economic activity and potentially higher interest rates.
Detailed Explanation
When the central bank sells government bonds, it takes money out of the economy. Other options are incorrect because Some might think selling bonds lowers interest rates, but it actually raises them; People may believe that selling bonds increases bank reserves, but it does the opposite.
Key Concepts
Open Market Operations
Monetary Policy
Interest Rates
Topic
Open Market Operations
Difficulty
hard level question
Cognitive Level
understand
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