Which of the following Federal Reserve policies will cause a reduction in the demand for bonds?

• A. Lowering the reserve requirement for banks
• B. Decreasing the discount rate
• C. Increasing the federal funds rate
• D. Purchasing government securities in the open market

Answer: (C)

Verified step by step guidance

1. Understand that the demand for bonds is influenced by interest rates and monetary policy actions by the Federal Reserve.
2. Recall that when the Federal Reserve increases the federal funds rate, it raises short-term interest rates, making newly issued bonds more attractive compared to existing bonds with lower rates.
3. Recognize that an increase in the federal funds rate typically causes the price of existing bonds to fall, which reduces their demand because investors prefer higher yields elsewhere.
4. Analyze the other options: lowering the reserve requirement or decreasing the discount rate generally increase the money supply and lower interest rates, which tends to increase demand for bonds, not reduce it.
5. Understand that purchasing government securities in the open market injects liquidity into the economy, lowering interest rates and increasing bond demand, so it does not reduce demand for bonds.