Economic statistics show that the economy is at the expansion stage of
the cycle. Which one of the following represents actions the Federal
Reserve Board is likely to take and the likely impact on investors?
 A: purchase government securities and raise the discount rate;
long-term bonds decline in price
 B: decrease bank reserve requirements to meet demand for loan funds;
natural resource stocks decline in price
 C: raise the discount rate and sell government securities; utilities
stocks decline in price
 D: curtail deficit spending and sell government securities; preferred
stocks rise in price

The correct response is (c).  By raising the discount rate and selling
government securities, the Fed will reduce the pace of money growth
and exert upward pressure on interest rates. This, in turn, will slow
the pace of expansion and keep inflation in check. Sales of government
securities to the public remove liquidity from the banking system and,
therefore, cause interest rates to rise. Rising interest rates tend to
exert downward pressure on utility stock prices. This is because
utility stocks are often purchased for their dividends, and higher
interest rates make dividend yields less attractive.