When the Federal Reserve increases the money supply,people ________.
A)decrease their purchases of bonds and other financial assets
B)may,in the short run,increase their purchases of goods and services
C)decrease the quantity of money holdings
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

When the Federal Reserve increases the money supply, it lowers interest rates which leads to an increase in borrowing and spending. This leads to an increase in demand for goods and services in the short run. So people may increase their purchases of goods and services in the short run. Option A is incorrect because when the money supply is increased, interest rates decrease, which means that the returns on fixed-income securities like bonds and financial assets decrease, making them less attractive for investors. Option C is also incorrect because an increase in money supply means people have more money to hold, so they are unlikely to decrease their quantity of money holdings. Therefore, option B is the correct answer.

When the Federal Reserve Increases the Money Supply,people ________