Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause

Question

Quizplus · Accepted Answer

When the Fed conducts an open market purchase of bonds, it means they buy bonds from banks in exchange for newly created reserves. This action increases the supply of reserves in the banking system, causing the federal funds rate (the interest rate at which banks lend to each other) to fall. As the federal funds rate falls, banks have more funds to lend out and are willing to lend at a lower interest rate. This decrease in interest rates makes bonds more attractive to investors, leading to an increase in the demand for bonds, and ultimately an increase in bond prices. Therefore, the correct choice is B.

Suppose the Fed Conducts an Open Market Purchase of Bonds