When the Fed buys bonds in the open market, we can expect
A) bond prices and interest rates to fall.
B) bond prices to rise and interest rates to fall.
C) bond prices to fall and interest rates to rise.
D) bond prices and interest rates to rise.

Question

Quizplus · Accepted Answer

When the Fed buys bonds in the open market, the increased demand for bonds causes their prices to rise. As bond prices and interest rates are inversely related, the increased demand for bonds leads to a decrease in interest rates. Therefore, we can expect bond prices to rise and interest rates to fall when the Fed buys bonds in the open market.

When the Fed Buys Bonds in the Open Market, We