Asked by Breanna Clayton on Jun 18, 2024
Verified
If the Fed buys government bonds on the open market,which of the following is likely to occur?
A) The money supply will expand.
B) The market rate of interest on government bonds will increase.
C) The market rate of interest on corporate bonds will increase.
D) The amount of investment spending will decrease.
E) All of the choices are likely to occur.
Open Market
A freely competitive market in which any buyer or seller can participate, characterized by the absence of monopolies or exclusive control.
Government Bonds
Debt securities issued by a government to finance its expenditures, often backed by the government's ability to tax its citizens.
Money Supply
The total amount of monetary assets available in an economy at a specific time, including cash, coins, and balances in bank accounts.
- Acquire knowledge about the role of the Federal Reserve's policies in shaping interest rates and investment expenditures.
- Absorb the implications of open market operations on the economic environment.
Verified Answer
VA
Valissa AbadiaJun 25, 2024
Final Answer :
A
Explanation :
When the Fed buys government bonds on the open market, it injects new money into the economy. This increases the reserves of banks, which in turn leads to an increase in the money supply. Hence, the correct choice is A.
Learning Objectives
- Acquire knowledge about the role of the Federal Reserve's policies in shaping interest rates and investment expenditures.
- Absorb the implications of open market operations on the economic environment.