Figure 10-8
-Refer to Figure 10-8. If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,

Question

Figure 10-8 
-Refer to Figure 10-8. If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,

Quizplus · Accepted Answer

When the Federal Reserve buys bonds, it increases the demand for bonds, leading to a rightward shift in the demand curve. This, in turn, leads to an increase in bond prices and a decrease in interest rates. As a result, investment spending will increase, leading to an increase in aggregate demand and closing the output gap. Option B correctly describes the effects of the Federal Reserve's bond-purchasing policy.

Figure 10-8 -Refer to Figure 10-8. If the Economy Is at Point