question archive If the Federal Reserve buys bonds on the open market, then the money supply will: a) increase causing a decrease in investment spending shifting aggregate demand to the right
If the Federal Reserve buys bonds on the open market, then the money supply will: a) increase causing a decrease in investment spending shifting aggregate demand to the right
Subject:EconomicsPrice:2.88 Bought3
If the Federal Reserve buys bonds on the open market, then the money supply will:
a) increase causing a decrease in investment spending shifting aggregate demand to the right.
b) increase causing an increase in investment spending shifting aggregate demand to the right.
c) decrease causing a decrease in investment spending shifting aggregate demand to the right.
d) decrease causing a decrease in investment spending shifting aggregate demand to the left.
e) increase causing a decrease in investment spending shifting aggregate demand to the left.
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The correct option is b) increase causing an increase in investment spending shifting aggregate demand to the right.
When the Fed buys bonds from the public, it pays money to them. This increases the money with the banks and increases the money supply. The increased money supply means that the interest rates fall. When this happens, firms look to make more investments as the cost of borrowing has fallen. The increased investment spending causes the aggregate demand to increase and shifts the aggregate demand curve to the right.
