Over the past few years, the Chinese have bought billions of dollars of U.S. bonds, pushing down U.S. interest rates. From this, you conclude that:
A) short-run output will rise along the IS curve, possibly pushing the economy toward expansion.
B) short-run output will fall along the IS curve, possibly pushing the economy toward recession.
C) short-run output will fall as the IS curve shifts left, possibly pushing the economy toward recession.
D) the federal government will lower taxes.
E) there will be no change in short-run output.

Question

Quizplus · Accepted Answer

When foreign entities buy U.S. bonds, it increases the demand for those bonds, which in turn lowers interest rates. Lower interest rates make borrowing cheaper, which can stimulate investment and consumption, leading to an increase in short-run output along the IS curve. This can push the economy toward expansion.

Over the Past Few Years, the Chinese Have Bought Billions