Use the following to answer questions . Exhibit: Effects of Monetary Policy -(Exhibit: Effects of Monetary Policy) Which of the following actions by the Fed could have caused the movement from AD₁ to AD₂ in Panel (a)? A) selling government bonds in the open market B) buying government bonds in the open market C) increasing the discount rate D) increasing the federal funds rate

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The movement from AD₁ to AD₂ shows an increase in AD (shift rightward). The Fed’s purchase of government bonds in the open market increases the money supply, which leads to a decrease in interest rates and an increase in investment spending and consumption, causing AD to shift rightward. Selling government bonds, increasing the discount rate, and increasing the federal funds rate would have contractionary effects on the economy, leading to a leftward shift in AD.

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