Final answer:
When the Fed sells bonds, it reduces the money supply and causes interest rates to rise, as part of a contractionary monetary policy. The correct option is (c).
Step-by-step explanation:
When the Fed sells bonds, it takes money out of the economy and reduces reserves, which contracts the money supply, causing interest rates to rise. This process is part of a contractionary monetary policy.
Selling bonds means that the Fed is reducing the quantity of money in the economy, which typically leads to higher interest rates.
Conversely, when the Fed buys bonds, it increases the money supply and pushes down interest rates, as part of an expansionary monetary policy.
Understanding these actions helps explain how the central bank manages the economy's money supply and influences interest rates.