If the Federal Reserve sells bonds on the open market, how would that impact purchases of U.S. financial assets by foreigners and net exports (based on the changing value of the dollar)?

a. Increase / Increase

b. Increase / Decrease

c. No Change / Decrease

d. Decrease / Decrease

e. Decrease / Increase

b. Increase/ decrease

Reason: When the Federal Reserve sells bond in the open market under open market operations, it absorbs excess liquidity from the economy. This makes the money supply in the economy to decrease. When the money supply decreases, given the money demand, the rate of interest will tend to increase. Increased rate of interest in the economy will attract foreign investors to invest in the country, which increases the purchase of US financial assets in the economy. The increased investments in the economy, will lead to currency appreciation. When the US dollar appreciates relative to other currencies, the exports from US will become costlier for the foreign countries. This will tend to decrease the exports.