The FED has recently decided to reverse the massive buildup of its holding of Treasury and mortgage bonds. Thus, they began to sell these Treasury securities in the financial markets to remove liquidity from them and reduce the supply of money and credit in the economy. This will create a shortage in the money market. (Q# 8a) Each time the FED now sells a large tranche (amount)of treasuryand mortgage bonds, what impact will this have on the moneymarketdirectly after the supply of money has decreased – in theimmediate "run"?[a] a surplus will be created in the money market[b] a shortage will be created in the money market[Q#8b] As a result of the outcome from the previous question,what wastrue in the money market?[a] the prevailing interest will be too high and an equilibriumbalance willbe restored by a reduction in the interest rate throughtime[b] the prevailing interest will too low and an equilibriumbalance will berestored by an increase in the interest rate through time

Answer: Note: the question does not clearly explain what to be done but it seems like one option out…

Answered: (Q#8a) Each time the FED now sells a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The FED has recently decided to reverse the massive buildup of its holding of
Treasury and mortgage bonds. Thus, they began to sell these Treasury
securities in the financial markets to remove liquidity from them and reduce
the supply of money and credit in the economy. This will create a shortage in
the money market.

(Q# 8a) Each time the FED now sells a large tranche (amount)
of treasury
and mortgage bonds, what impact will this have on the money
market
directly after the supply of money has decreased – in the
immediate "run"?
[a] a surplus will be created in the money market
[b] a shortage will be created in the money market
[Q#8b] As a result of the outcome from the previous question,
what was
true in the money market?
[a] the prevailing interest will be too high and an equilibrium
balance will
be restored by a reduction in the interest rate through
time
[b] the prevailing interest will too low and an equilibrium
balance will be
restored by an increase in the interest rate through time

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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