Final answer:
If the Federal Reserve sells Treasury bonds to commercial banks, the equilibrium supply of money will decrease and the interest rate will increase.
Step-by-step explanation:
If the Federal Reserve sells Treasury bonds to commercial banks, the equilibrium supply of money will decrease and the interest rate will increase.
When the Federal Reserve sells Treasury bonds, it reduces the money supply in the economy. This is because when commercial banks purchase Treasury bonds, they pay the Federal Reserve with their reserves, which reduces the amount of money available for lending. As a result, there is less money in circulation, leading to a decrease in the equilibrium supply of money.
In addition, when the money supply decreases, market interest rates tend to rise. This is because there is less money available for lending, so borrowers need to compete for the available funds, driving up interest rates.