-

The economy is at the equilibrium shown at point a in the above figure. If the Fed
A)buys government securities, the economy moves to an equilibrium at point b.
B)sells government securities, the economy moves to an equilibrium at point b.
C)sells government securities, the economy moves to an equilibrium at point c.
D)buys government securities, the economy moves to an equilibrium at point c.
E)None of the above are correct because the economy will remain at point a if the Fed buys or if the Fed sells government securities.

Question

-

The economy is at the equilibrium shown at point a in the above figure. If the Fed
A)buys government securities, the economy moves to an equilibrium at point b. 
B)sells government securities, the economy moves to an equilibrium at point b. 
C)sells government securities, the economy moves to an equilibrium at point c. 
D)buys government securities, the economy moves to an equilibrium at point c. 
E)None of the above are correct because the economy will remain at point a if the Fed buys or if the Fed sells government securities.

Quizplus · Accepted Answer

When the Fed buys government securities, it increases the money supply, which typically lowers interest rates and stimulates economic activity, moving the economy to a higher output equilibrium like point b.

- the Economy Is at the Equilibrium Shown at Point a Point