Monetary policy works as follows: when the Fed purchases government bonds, A) th

Question

Monetary policy works as follows: when the Fed purchases government bonds,
A) the money supply decreases, the interest rate rises, and investment spending falls.
B) the money supply increases, the interest rate rises, and investment spending falls.
C) the money supply decreases, the interest rate falls, and investment spending rises.
D) the money supply increases, the interest rate falls, and investment spending rises.
E) the money supply decreases, the interest rate falls, and investment spending falls.

Explanation / Answer

D) Is correct. The purchasing of bonds injects reserves into the system, which increases the money supply. A larger supply decreases interest rates, which are the price of money. Since the price of money has gone down, companies borrow and invest more.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

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