Suppose the Federal Reserve is conducting an expansionary monetary policy. It will _____ Treasury bills on the open market, so that the money supply will _____, interest rates will _____, planned investment spending will _____, and the AD curve will shift to the _____.

Question

Quizplus · Accepted Answer

During an expansionary monetary policy, the Federal Reserve buys Treasury bills on the open market, which increases the money supply. As a result, interest rates fall, which encourages planned investment spending, leading to an increase in aggregate demand (AD). Therefore, the AD curve shifts to the right. Option A is incorrect because the money supply should increase, not decrease. Option B is incorrect because interest rates should rise, not fall, during a contractionary monetary policy. Option D is incorrect because interest rates should rise, not fall, during a contractionary monetary policy.

Suppose the Federal Reserve Is Conducting an Expansionary Monetary Policy