Figure 15.3

-Refer to Figure 15.3. Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then
A) investment spending will decline.
B) bond prices will decline.
C) equilibrium real GDP will fall.
D) interest rates will fall.
E) money demand will decline.

Question

Figure 15.3
 
-Refer to Figure 15.3. Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then
A) investment spending will decline. 
B) bond prices will decline. 
C) equilibrium real GDP will fall. 
D) interest rates will fall. 
E) money demand will decline.

Quizplus · Accepted Answer

When the Fed purchases government bonds in the open market, it increases the supply of money in the economy. This increases the amount of money available for lending, which in turn leads to a decrease in interest rates. Therefore, D is the correct answer as interest rates will fall.

Figure 15.3 -Refer to Figure 15.3. Starting from the Equilibrium Illustrated in the Equilibrium