Asked by Christin Evans on May 16, 2024
Verified
If the Fed buys government bonds in the open market,
A) interest rates will rise and investment spending will decrease.
B) interest rates and investment spending will remain unchanged but inflation will increase.
C) interest rates will fall and investment spending will increase.
D) banks' excess reserves will be reduced and loans will be called in,leading to an increase in bankruptcies.
E) interest rates will fall and investment spending will decrease.
Excess Reserves
Bank reserves that exceed the minimum reserve requirements set by central banking authorities.
Open Market
A scenario where economic transactions are conducted in a free manner without restrictions, allowing for the buying and selling of goods and services.
Government Bonds
Debt securities issued by a government to finance its expenditures, considered low-risk investments.
- Understand the impact of Federal Reserve's actions on interest rates and investment spending.
Verified Answer
KB
Karandeep BainsMay 21, 2024
Final Answer :
C
Explanation :
When the Fed buys government bonds, it increases the money supply in the economy, which leads to a decrease in interest rates. Lower interest rates make it cheaper for businesses to borrow money for investment spending, leading to an increase in investment spending.
Learning Objectives
- Understand the impact of Federal Reserve's actions on interest rates and investment spending.