Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at point (R₀, i₀).

-Refer to the scenario above.If the Fed undertakes an open market purchase of bonds,________.

Question

Scenario: The following figure shows the federal funds market. Assume that the market of reserves is in equilibrium at point (R₀, i₀).
 
-Refer to the scenario above.If the Fed undertakes an open market purchase of bonds,________.

Quizplus · Accepted Answer

An open market purchase of bonds by the Fed increases the reserves available in the market. This increases the reserves supply curve, shifting it to the right from RS₀ to RS₁, resulting in a new equilibrium at point (R₁, i₁).

Scenario: the Following Figure Shows the Federal Funds Market