When the Fed makes an open market purchase, which way does the supply curve for bonds shift?

When the Federal Reserve (the Fed) conducts an open market purchase, it buys government bonds from the public. This action directly influences the supply and demand dynamics in the bond market.

By purchasing bonds, the Fed increases the demand for these bonds. As demand for bonds rises, the price of bonds tends to go up, which leads to a decrease in the yield (or interest rate) on those bonds. The increase in demand effectively means that there are fewer bonds available for sale in the market because the Fed is absorbing some of the existing supply. This interaction shifts the supply curve for bonds to the left, indicating a decrease in the overall supply of bonds available to be traded.

Thus, the correct interpretation is that when the Fed makes an open market purchase, the supply curve for bonds shifts left and the supply decreases, which aligns with the economic principles of supply and demand.