Final answer:
A Fed open market sale of bonds leads to a decrease in bond prices along with an increase in interest rates, enacting contractionary monetary policy aimed at reducing the money supply and aggregate demand.
Step-by-step explanation:
When the Federal Reserve (often referred to as the Fed) conducts an open market sale of bonds, it is engaging in a contractionary monetary policy. This action will tend to cause the price of bonds to decrease and the interest rate to increase. The sale of bonds means that the Fed is increasing the supply of bonds in the market. According to the laws of supply and demand, an increased supply leads to a decrease in price, assuming demand remains constant. Consequently, when bond prices fall, the interest rates—that is, the returns that new buyers get on their bond investments—must increase to attract buyers.
Moreover, the Fed's sale of bonds results in money flowing from individual banks into the Fed, thereby reducing the quantity of money in the economy. This reduced money supply causes a leftward shift in the money supply curve in the money market, ultimately leading to higher interest rates. These higher rates deter borrowing for investment and consumption, thereby reducing aggregate demand, which can lower inflation and slow economic growth in the short term.