Which of the following sequence of events follows an open market purchase by the Fed?
A) r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
B) r↑ ⇒ I↑ ⇒ AE↓ ⇒ Y↑
C) r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D) r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↓

Question

Quizplus · Accepted Answer

When the Fed makes an open market purchase (buying government securities), it increases the money supply, which leads to a decrease in interest rates (r↓). Lower interest rates stimulate investment spending (I↑), which in turn increases aggregate expenditure (AE↑). This increase in aggregate expenditure leads to an increase in output and income (Y↑).

Which of the Following Sequence of Events Follows an Open