In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP. Figure 13.3 Refer to Figure 13.3.Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then:
A)investment spending will decline.
B)bond prices will decline.
C)equilibrium real GDP will fall.
D)interest rates will fall.
E)money demand will decline.

Question

In the figure given below panel A represents money market equilibrium, panel B represents investment demand, and panel C represents equilibrium real GDP. Figure 13.3  Refer to Figure 13.3.Starting from the equilibrium illustrated in the graphs, if the Federal Reserve purchases government bonds in the open market, then:
A)investment spending will decline. 
B)bond prices will decline. 
C)equilibrium real GDP will fall. 
D)interest rates will fall. 
E)money demand will decline.

Quizplus · Accepted Answer

When the Federal Reserve purchases government bonds in the open market, it injects money into the economy, increasing the money supply. This leads to a decrease in interest rates as the demand for money decreases. This decrease in interest rates will increase investment spending, shifting the investment demand curve to the right. The increase in investment demand will lead to an increase in equilibrium real GDP. Thus, the correct choice is D, as interest rates will fall.

In the Figure Given Below Panel a Represents Money Market