The level of GDP, ceteris paribus, will tend to increase when
A) reserve requirements are increased.
B) there is an increase in the discount rate.
C) the Federal Reserve buys government securities in the open market.
D) the Federal Reserve sells government securities in the open market.

Question

Quizplus · Accepted Answer

When the Federal Reserve buys government securities in the open market, it injects money into the economy, increasing the money supply. This, in turn, leads to lower interest rates, increased borrowing and spending, and ultimately an increase in GDP. Therefore, this is the best choice for an increase in GDP. Reserve requirements and the discount rate, on the other hand, have an impact on the money supply but not necessarily on GDP. Selling government securities in the open market would decrease the money supply, decreasing spending and potentially lowering GDP.

The Level of GDP, Ceteris Paribus, Will Tend to Increase