Question

Which of these changes is likely to follow when the Fed sells U.S. government securities? Question 22 options: Aggregate demand will increase. The demand for financial securities will decrease. Rate of interest will decrease. Planned investment spending will decrease. Real GDP will increase.

Answer 1

Planned investment spending will decrease.

Step-by-step explanation:

The sale of government bonds is a contractionary monetary policy instrument used by the Fed that serves to wipe the monetary base in times of inflation and economic warming. Through the sale of bonds, the Fed manages to reduce the amount of money in circulation in the economy, curbing inflation and economic activity. A restrictive monetary policy impacts demand and investment as people stop consuming and investing to buy government bonds in the hope of future income. Therefore, investments tend to decrease when the Fed decides to sell government securities.