Suppose that the United States is facing high unemployment, and the Federal Rese

Question

Suppose that the United States is facing high unemployment, and the Federal Reserve engages in open-market purchases of bonds MS Show the effects of this action upon the money market and upon investment spending MD Quantity of Money (trillions of dollars) Investment According to the aggregate demand and aggregate supply model, what happens to output in the short run? What happens to investment spending? O it decreases O it stays the same Oit increases O O O it increases it decreases it stays the same we cannot tell

Explanation / Answer

1> it increases

Investment spending is an injection into the circular flow of income. So, if the government increases the money supply, it will be invested in the firms.

2> it increases

Since there is a sudden increase in money, the short run aggregate demand will rise and thus the output should rise.

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