When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, if the Fed sells bonds then the

Question

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, if the Fed sells bonds then the

BlackTom AI · Accepted Answer

Selling bonds by the Fed reduces bank reserves and therefore the supply of money. Open-market sales mean the public pays the Fed for bonds using bank deposits, which drains reserves from the banking system. With the money market drawn with the value of money (V = 1/P) on the vertical axis and the quantity of money on the horizontal axis, the nominal money supply is vertical (set by the Fed). A Fed bond sale shifts that vertical money-supply line left (a decrease in M_s).

Step-by-step reasoning:
1. Relevant concepts: open-market operations, money supply curve (vertical), value of money V = 1/price level P, and money demand (downward sloping in V–M space because higher V means lower nominal prices so each dollar buys more goods, reducing nominal money balances demanded).
2. Fed sells bonds → banks/public pay the Fed → reserves and deposit balances fall → nominal money supply (M_s) decreases → supply curve shifts left.
3. In the V–M diagram this leftward shift raises the equilibrium value of money (V rises). Because V = 1/P, an increase in V implies a decrease in the price level P. (For example, if V rises from 0.5 to 1.0, then P falls from 2.0 to 1.0.)
4. Therefore the immediate effects are: money supply decreases and the price level decreases; equivalently the value of money increases.

Why the correct answer is correct: It links the mechanical effect of a Fed bond sale (reducing money supply) to the inverse relationship between value of money and price level (V = 1/P), so a higher V means a lower P.

Why other possibilities would be wrong: Any option claiming the money supply increases is inconsistent with an open-market sale. Any option claiming the price level rises would contradict V = 1/P since the sale raises V, not lowers it.

The final conclusion matches the provided answer: money supply and the price level decrease.

When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, if the Fed sells bonds then the单项选择题

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