If the Federal Reserve increases its bond purchases, the short-run effects will be
A) an increase in the money supply and lower real interest rates.
B) a decrease in the money supply and lower real interest rates.
C) an increase in the money supply and higher real interest rates.
D) a decrease in the money supply and higher real interest rates.

Question

Quizplus · Accepted Answer

When the Federal Reserve increases its bond purchases, it injects more money into the economy, leading to an increase in the money supply. This increase in the money supply puts downward pressure on real interest rates, as the supply of loanable funds increases. Therefore, the short-run effects of an increase in bond purchases would be an increase in the money supply and lower real interest rates.

If the Federal Reserve Increases Its Bond Purchases, the Short-Run