Use the following to answer questions .
Exhibit: Effects of Monetary Policy
-(Exhibit: Effects of Monetary Policy) If the Fed acts to close the output gap in Panel (a), it would
A) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate.
B) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.
C) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate.
D) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.

Question

Use the following to answer questions .
Exhibit: Effects of Monetary Policy 
-(Exhibit: Effects of Monetary Policy) If the Fed acts to close the output gap in Panel (a), it would
A) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
B) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate. 
C) buy government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and lower the interest rate. 
D) sell government bonds which will lead to the shift in demand for bonds in Panel (b). This action will raise the price of bonds and increase the interest rate.

Quizplus · Accepted Answer

Buying government bonds will increase the money supply and cause a downward shift in the money market in panel (a), resulting in lower interest rates. Lower interest rates will increase investment and consumption, leading to an increase in output and employment, and eventually closing the output gap.

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