Final answer:
The correct answer is b) hold more money than they would like and attempt to sell bonds. This action occurs as individuals seek to decrease their money holdings by purchasing other assets, in this case, bonds, thereby affecting their cash balances and portfolio.
Step-by-step explanation:
An excess supply of money occurs when people hold more money than they would like and attempt to adjust their portfolios accordingly. The correct answer to the student's question is option b) hold more money than they would like and attempt to sell bonds.
When individuals have more money than they prefer, they look for ways to exchange this excess cash for other assets such as bonds, thereby reducing their cash balances and adjusting their portfolio to their desired allocation.
Considering the central bank's operations, when it buys bonds, this increases the money supply in the economy because money flows from the central bank to the banks' reserves. Conversely, when a central bank sells bonds, the money supply is reduced as funds flow from the banks back to the central bank. These operations are directly related to the central bank's monetary policy goals and affect overall liquidity in the financial system.