During 2001-2004, the Fed injected additional reserves into the banking system, which reduced the federal funds rate and other short-term interest rates. Other things constant, what is the most likely short-run impact of this policy?
A) an increase in the rate of unemployment
B) a reduction in the growth of employment
C) an increase in aggregate demand and real GDP
D) a reduction in the long-run rate of inflation

Question

Quizplus · Accepted Answer

By injecting additional reserves into the banking system, the Fed lowered short-term interest rates, which in turn stimulated spending and investment, leading to an increase in aggregate demand and real GDP in the short run. The lower interest rates also incentivized firms to borrow and invest, which can lead to job creation and economic growth. There is no indication that this policy would lead to an increase in unemployment or a reduction in the growth of employment, and while the reduction in short-term interest rates may impact long-run inflation, it is not the most likely short-run impact.

During 2001-2004, the Fed Injected Additional Reserves into the Banking