If the money market is initially in equilibrium at point E, and the central bank sells Treasury bills, then the interest rate will:

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Question restatement: If the money market is initially in equilibrium at point E, and the central bank sells Treasury bills, then the interest rate will:
- Options: 1) remain at rE. 2) move toward rL. 3) shift rightward. 4) move toward rH.

Analysis of each option:
Option 1: remain at rE. This would imply no change in the money market, which cannot be the case when the central bank sells Treasury bills. Selling Tbills contracts the money supply, creating upward pressure on interest rates, so the equilibrium rate must move away from rE. Therefore, this option is incorrect.

Option 2: move toward rL. A decline in the interest rate would occur if the money supply increased or if money demand shifted to the right in a way that lowers r. However, selling Treasuries reduces the money supply, not increases it, which tends to raise the rate rather than lower it. Thus, this option is incorrect.

Option 3: shift rightward. In the typical money market diagram with the vertical money supply curve, a policy action that reduces the money stock shifts the supply curve left, not the curve to the right. A “shift rightward” would imply a larger quantity of money at any given rate, which contradicts the effect of selling Tbills. Hence, this option is incorrect.

Option 4: move toward rH. When the central bank sells Treasury bills, the money supply decreases. With a lower money supply, the equilibrium interest rate must rise to restore money market balance, moving the rate from rE toward the higher rate rH. This matches the standard money market response to contractionary open market operations. Therefore, this option is correct.

In summary: selling Treasuries reduces money supply, which pushes the interest rate up toward rH; the other options misstate the direction or type of shift in the money market in response to this operation.

ECON 201 Sections 2 & 3, Winter 2025 14 Case Study Monetary Policy

If the money market is initially in equilibrium at point E, and the central bank sells Treasury bills, then the interest rate will:

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ECON 201 Sections 2 & 3, Winter 2025 14 Case Study Monetary Policy

If the money market is initially in equilibrium at point E, and the central bank sells Treasury bills, then the interest rate will:

View Explanation

Log in for full answers

Similar Questions

Assume that the money demand function is left parenthesis (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

(Figure: Money Market I) Use Figure: Money Market I. If the interest rate is at rL, and the central bank neither buys nor sells Treasury bills, then the interest rate will:

In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

Figure 31-1 ​ Refer to Figure 31-1. When the money supply curve shifts from MS1 to MS2,

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r3, then people will bonds and the interest rate will .

In the market for money, an interest rate below equilibrium results in an excess money and the interest rate will .

Figure 31-1 Refer to Figure 31-1. When the money supply curve shifts from MS1 to MS2,