Question

If the FOMC orders the open market desk to sell government​ securities,

A. the money supply will decrease​, and the interest rate will increase.
B. the money supply will increase​, and the interest rate will increase.
C. the money supply will increase​, and the interest rate will decrease.
D. the money supply will decrease​, and the the interest rate will decrease.

Answer 1

Answer: Option(a) is correct.

Explanation:

FOMC (Fed open market committee) is monetary policy making body of United states who implements various money supply related policy.

Here, FOMC orders the open market desk to sell government​ securities, which lowers the money supply and increases the interest rate.

Fed use this monetary policy instrument to control the money supply in the economy.

This effect also shown in a diagram.

In the IS-LM diagram, it was shown that there is a shift in the LM curve leftwards due to decrease in the money supply. So, this decrease in the money supply raises the interest rate from i to i' and decreases output from Y to Y'.