Assume the money market is in equilibrium. The Federal Reserve Bank has decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____.

Question

Quizplus · Accepted Answer

When the Federal Reserve Bank purchases Treasury bills in an open market operation, it injects money into the economy, increasing the supply of money. As a result, the supply curve shifts outward, causing the interest rate to fall. Therefore, option A is the correct choice. Option B and C can be eliminated as they both suggest a fall in the interest rate, but incorrectly identify the shift in the curve. Option D suggests a rise in the interest rate, which is contrary to what happens when the central bank purchases Treasury bills.

Assume the Money Market Is in Equilibrium