Question

All else equal, when the federal reserve banks engage in a restrictive monetary policy, the prices of government bonds usually multiple choice

O fall.
O rise.
O remain constant.
O move in the same direction as the bonds' interest rate yield.

Answer 1

Restrictive monetary policy by the Federal Reserve causes government bond prices to fall, as bond supply increases and market demand mandates higher yields to attract buyers.

Step-by-step explanation:

When the Federal Reserve engages in a restrictive monetary policy, the prices of government bonds usually fall.

A restrictive (or contractionary) monetary policy is implemented by the Federal Reserve when it aims to reduce the amount of money circulating in the economy. One of the primary tools for this policy is selling government bonds, which increases the supply of bonds in the market. As the supply of bonds goes up, their prices tend to go down, based on the law of supply and demand.

This increase in bond supply leads to higher interest rates in the economy because the return on investment from these bonds needs to be more attractive to compensate for the increased supply. These higher interest rates can discourage borrowing and spending, leading to a reduction in aggregate demand, eventually slowing down economic growth and curbing inflation. The high-interest rates can also lead to an appreciation of the domestic currency, which can reduce exports by making them more expensive for foreign buyers and thus affecting the trade balance negatively.