If the Fed wishes to stimulate aggregate demand, it will conduct an _____ which will _____ bond prices, _____ interest rates, and _____ investment.

Question

Quizplus · Accepted Answer

If the Fed wishes to stimulate aggregate demand, it will conduct an open market purchase, which involves purchasing bonds from financial institutions. This will increase the demand for these securities, raising their prices. As bond prices rise, interest rates will fall, because the interest rate and bond prices are inversely correlated. This will incentivize businesses and consumers to borrow and invest more, which in turn will stimulate aggregate demand.

If the Fed Wishes to Stimulate Aggregate Demand, It Will