When the Fed purchases more bonds and, thereby, increases the money supply, the initial effects of the more expansionary monetary policy will often be weakened as a result of
A)lower nominal interest rates and a decline in the velocity of money.
B)higher nominal interest rates and a decline in the velocity of money.
C)higher nominal interest rates and an increase in the velocity of money.
D)lower real interest rates and an increase in the velocity of money.

Question

Quizplus · Accepted Answer

When the Fed purchases bonds, it increases the money supply, leading to lower nominal interest rates. This can cause a decline in the velocity of money as people hold onto cash rather than spend it, weakening the initial effects of the policy.

When the Fed Purchases More Bonds And, Thereby, Increases the Money