If the economy is at potential GDP and the Fed makes an open market purchase of government securities,in the short run bank reserves ________,the nominal interest rate ________,and the aggregate demand curve ________.
A) stay constant; does not change; does not shift
B) increase; rises; shifts rightward
C) decrease; falls; shifts rightward
D) increase; falls; shifts rightward

Question

Quizplus · Accepted Answer

If the economy is at potential GDP, then the short-run aggregate supply curve is vertical. An open market purchase of government securities by the Fed increases bank reserves, which in turn increases the supply of loanable funds in the money market, leading to a fall in the nominal interest rate. Since the interest rate falls, investment and consumption expenditures increase, leading to an increase in aggregate demand. Therefore, the aggregate demand curve shifts rightward.

If the Economy Is at Potential GDP and the Fed