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 Quantity of MMorwey Ihi lians of dolars) According to the aggregate demand and aggregate supply model, what happens to output in the short run What happens to investment spending? O it stays the same it decreases it increases O it decreases O it increases it stays the same O we cannot tell

Explanation / Answer

When the Fed engages in open market operations and purshases bonds, it gives money to the public in return. Thus,the money supply in the economy rises. Therefore, the MS curve shifts to the right. When money supply in the economy rises, the interest rates fall.

As can be seen in the graph, investment spending and interest rate are negatively related. When the interest rates fall, investment spending rises.

The output increases in the short run because of increased investment and spending.'

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.