The level of GDP, ceteris paribus, will tend to increase when:
A) Reserve requirements are increased
B) There is an increase in the discount rate
C) The Federal Reserve buys government securities in the open market
D) The Federal Reserve sells government securities in the open market

Question

Quizplus · Accepted Answer

When the Federal Reserve buys government securities in the open market, it increases the money supply and makes it easier for people to borrow money, which leads to an increase in spending and ultimately increases the level of GDP. Whereas if the reserve requirements are increased or there is an increase in the discount rate, it restricts the ability of banks to lend money, which reduces spending and decreases the level of GDP. Selling government securities in the open market also reduces the money supply, leading to decreased spending and lower GDP.

The Level of GDP, Ceteris Paribus, Will Tend to Increase