Which of the following policy options would simultaneously increase interest rates and decrease outp...........

Economics- Phase (I & II) IS-LM

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Which of the following policy options would simultaneously increase interest rates and decrease output?

The Federal Reserve Board sells bonds through open market operations.

The federal government increases its defense purchases.

The Federal Reserve Board expands the money supply.

The federal government increases the tax rate.

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Explanation:

The Federal Reserve Board sells bonds through open market operations. Selling bonds reduces the money supply in the economy. The lower money supply results in a higher interest rateand lower output level (i.e., an upward shift in the LM curve); investment unambiguously declines.

Selling bonds reduces the money supply in the economy. The lower money supply results in a higher interest rate and lower output level (i.e., an upward shift in the 1 LM curve); investment unambiguously declines. Option C always increases investment, while options B and D have uncertain implications for investment.

Hence option 1st is correct.