When the Fed buys bonds in the open market, we can expect
A) investment and net exports to rise.
B) investment will rise and net exports to fall.
C) investment will fall and net exports to rise.
D) investment and net exports fall.

Question

Quizplus · Accepted Answer

When the Fed buys bonds in the open market, it increases the money supply and lowers interest rates. This leads to higher investment due to cheaper borrowing costs and increased consumption due to increased wealth. The decrease in interest rates also leads to a weaker currency, which makes exports relatively cheaper and can increase net exports. Therefore, we can expect investment and net exports to rise.

When the Fed Buys Bonds in the Open Market, We