With the economy in long-run equilibrium, if the Fed moves unexpectedly to raise aggregate demand by increasing the reserves of depository institutions through substantial open market purchases, what happens in the short-run?
A)Interest rates will fall.
B)Inventories will decline unexpectedly.
C)There will be upward pressure on output prices.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

When the Fed increases the reserves of depository institutions through open market purchases, it injects more money into the economy, leading to lower interest rates (A), stimulating spending and reducing inventories (B), and increasing demand that puts upward pressure on prices (C). Thus, all of the options are correct outcomes in the short run.

With the Economy in Long-Run Equilibrium, If the Fed Moves