Homework Answers
Answer
Contractionary open market operation is the operation in which Money supply decreases. So option (a) and (d) are incorrect.
This decrease in money supply will shift money supply curve to the left which will result in increase in short term interest rate and price of T bills are inversely related to interest rate. Thus Price of T bills will fall.
Hence, the correct answer is (c) The price of Treasury Bills falls, the short term rate of interest rises and the money supply decreases.
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