When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM

Question

Quizplus · Accepted Answer

When bond traders for the Federal Reserve want to decrease interest rates, they buy bonds. This increases the demand for bonds, which in turn raises the price of bonds and decreases their yield. As a result, the LM curve (which shows the different combinations of interest rates and output levels that result in equilibrium in the money market) shifts to the right. By buying bonds, the Federal Reserve injects money into the economy, which can stimulate economic growth by making it easier for businesses and individuals to obtain credit.

When Bond Traders for the Federal Reserve Seek to Decrease