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Effect on short-term interest rates of Fed selling bonds

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If the Federal Reserve sells government bonds, will short-term interest rates increase or decrease? Explain how this will affect aggregate demand and the rate of growth of the economy.

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The solution examines the effect on short-term interest rates if Fed sells government bonds. It also explains how this will affect aggregate demand and the rate of growth of the economy.

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If the Federal Reserve sells government bonds, will short-term interest rates increase or decrease? Explain how this will affect aggregate demand and the rate of growth of the economy.

Answer:
A bank's balance sheet has loans and reserves as assets and Deposits as liabilities. Reserves include currency in the vault and deposits at the Federal Reserve (Fed). The Fed thus holds deposits of member banks. A Bank earns interest on loans and pays interest on deposits. The money ...

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