If the Fed makes an open market ________ of government securities,the federal funds rate ________ and the immediate impact is to shift the aggregate ________ curve.
A) purchase; falls; demand
B) sale; falls; demand
C) sale; rises; supply
D) purchase; rises; supply

Question

Quizplus · Accepted Answer

When the Fed makes an open market purchase of government securities, it increases the money supply, leading to a fall in the federal funds rate. This in turn shifts the aggregate demand curve to the right due to lower borrowing costs, which increases spending and output. Therefore, the correct choice is A, as a purchase of securities leads to a fall in the federal funds rate and a shift in the aggregate demand curve.

If the Fed Makes an Open Market ________ of Government