Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases the money supply, leading to lower interest rates.
B
It decreases the money supply, which raises interest rates.
C
It has no impact on interest rates or the money supply.
D
It reduces government spending, causing a recession.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank sells government bonds, it is essentially taking money out of the economy. Investors buy these bonds, which means they are spending cash that could have been used for other purposes, like buying goods or investing in businesses. This decrease in cash available for spending can lead to higher interest rates, as banks have less money to lend. For example, if a central bank sells a large number of bonds, a business may find it harder to get a loan for expansion because borrowing costs have increased. Overall, this action can slow down economic growth in the short run by making it more expensive for people and businesses to borrow money.
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 increases money supply; This choice claims there is no impact.
Key Concepts
Open Market Operations
Interest Rates
Money Supply
Topic
Open Market Operations
Difficulty
easy level question
Cognitive Level
understand
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