Open Market Operations and Loanable Funds
Assume the real interest rate in the loanable funds market is above its equilibrium level, resulting in a surplus. How would an open market sale of government bonds by a central bank most likely affect this market?
A
It would have no effect on interest rates but reduce quantity demanded for loans.
B
It would increase interest rates further and exacerbate the surplus in loanable funds.
C
It would reduce interest rates and eliminate the surplus in loanable funds.
D
It would stimulate investment demand and ultimately correct any existing surplus.
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