Which statements describe how the fed responds to high inflation? Check all that apply.
A) It charges banks more interest.
B) It pays banks less interest.
C) It sells more securities.
D) It decreases the money supply.
E) In increases the money supply.
Answer: C) It sells more securities.
This occurs because holders of existing bonds which offer coupons lower than the current interest rates receive less income per bond as compared to the newly issued bonds that individuals can buy. Therefore, existing bonds become less attractive to buyers due to lower yield, and that can only be made right by the price going down. The negative correlation between interest rates and bond prices is one of the basics of bonds in the bond markets. The effects of successive issues of bonds on the existing bonds are that as new bonds have higher interest rates than the older issues, the prices of the older bonds decline because there is low demand for them. Such is an agreement with option c, meaning that an increase in the interest rates results in a decrease in bond prices.