Question at position 7 In a country that has a flexible exchange rate and a banking system with limited reserves, an open market sale of bonds by the central bank will most likely change the money supply, the interest rate, and the value of the country’s currency in which of the following ways? Money Supply: Increase; Interest Rate: Decrease; Value of the Currency: IncreaseMoney Supply: Decrease; Interest Rate: Decrease; Value of the Currency: DecreaseMoney Supply: Decrease; Interest Rate: Increase; Value of the Currency: DecreaseMoney Supply: Decrease; Interest Rate: Increase; Value of the Currency: IncreaseMoney Supply: Increase; Interest Rate: Decrease; Value of the Currency: Decrease

Question

Question at position 7  In a country that has a flexible exchange rate and a banking system with limited reserves, an open market sale of bonds by the central bank will most likely change the money supply, the interest rate, and the value of the country’s currency in which of the following ways? Money Supply: Increase; Interest Rate: Decrease; Value of the Currency: IncreaseMoney Supply: Decrease; Interest Rate: Decrease; Value of the Currency: DecreaseMoney Supply: Decrease; Interest Rate: Increase; Value of the Currency: DecreaseMoney Supply: Decrease; Interest Rate: Increase; Value of the Currency: IncreaseMoney Supply: Increase; Interest Rate: Decrease; Value of the Currency: Decrease

BlackTom AI · Accepted Answer

An open-market sale of government bonds by the central bank removes reserves from the banking system, so the immediate effect is a fall in the monetary base and, via the money multiplier, a fall in the money supply.

Relevant concepts:
- Open-market operations: selling bonds drains bank reserves; buying bonds injects reserves.
- Money multiplier: ΔM = (1/rr) × ΔReserves (rr = required reserve ratio). A negative ΔReserves (sale) yields a negative ΔM (money supply falls).
- Interest rate determination: a smaller money supply for a given money demand raises the equilibrium nominal interest rate.
- Flexible exchange rate & capital flows: higher domestic interest rates attract foreign capital, increasing demand for the domestic currency and causing appreciation.

Step-by-step reasoning:
1. Central bank sells bonds worth B. Banks and/or nonbanks pay for these bonds with bank reserves and deposits; reserves decline by about B.
2. Using the money multiplier, the total money supply change ≈ (1/rr) × (−B). Thus money supply decreases (intermediate step shown: if rr = 0.1 and B = 100, ΔReserves = −100 → ΔM ≈ −1000).
3. With a reduced money supply and unchanged money demand, the equilibrium interest rate rises (tight money → higher rates).
4. Higher domestic nominal/real interest rates make domestic assets more attractive to foreign investors, causing capital inflows. To buy domestic assets, foreigners demand the domestic currency, increasing its price (appreciation). Under a flexible exchange rate this appreciation is realized in the FX market.

Why other options are incorrect (brief):
- Options claiming the money supply increases describe open-market purchases, not sales.
- Options that pair a decreased money supply with a falling interest rate contradict liquidity/interest rate mechanics; a contraction raises rates.
- Options that pair higher interest rates with currency depreciation ignore the capital-inflow mechanism under flexible rates (higher rates normally appreciate the currency).

Therefore the correct outcome is: Money Supply: Decrease; Interest Rate: Increase; Value of the Currency: Increase — which matches the provided answer.

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类似问题

If the Reserve Bank of Australia wishes to decrease the money supply, it should

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The FOMC will ______ securities to ________ the monetary base, through the open market desk.

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希望你的学习变得更简单

The FOMC will securities to __ the monetary base, through the open market desk.