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Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates.
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates.
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates.
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Question

Use the following to answer questions .
Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply 
-(Exhibit: Monetary Policy and Long-Run Aggregate Demand and Aggregate Supply) If the economy is at point c, the Federal Reserve can close the output gap by buying bonds. In the bond market,
A) the supply curve shifts right, leading to a decrease in bond prices and an increase in interest rates. 
B) the demand curve shifts right, leading to an increase in bond prices and a decrease in interest rates. 
C) the supply curve shifts left, leading to an increase in bond prices and an increase in interest rates. 
D) the demand curve shifts left, leading to a decrease in bond prices and an increase in interest rates.

Quizplus · Accepted Answer

When the Federal Reserve buys bonds, it increases the demand for bonds in the bond market, shifting the demand curve to the right. This leads to an increase in bond prices and a decrease in interest rates, which in turn increases investment and aggregate demand, ultimately closing the output gap.

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