Suppose the Fed sells $25 million worth of Treasury bonds in the open market. This action will serve to ________ the consumption of interest-rate sensitive goods like home mortgages. The U.S. dollar will ________ against the other currencies.
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A. B. C. D.C
The sale of bonds implies that the Fed takes out money from the economy. This reduces the monetary base and the total money supply in the economy, causing the real interest rates to rise in the short run. This makes the opportunity cost of consuming interest rate sensitive goods like homes and cars more expensive, leading to a decrease in the consumption of these goods. The high real rates will attractforeign funds into the U.S., causing the demand for U.S. dollars to increase. The U.S. dollar will thus appreciate in the short run.