Asked by Nguyên Tr?ng on May 21, 2024
Verified
If the Fed buys government bonds on the open market,which of the following will occur?
A) The money supply will contract.
B) The market rate of interest on corporate bonds will increase.
C) The market rate of interest on government bonds will increase.
D) The interest rate will fall.
E) The amount of investment spending will decrease.
Open Market
An economic system in which buying and selling of goods and services are conducted freely with minimal government intervention.
Government Bonds
Securities issued by a government to finance its expenditures, repaid over a period.
- Comprehend how the Federal Reserve's decisions influence interest rates and the expenditures in investments.
- Gain insights into the consequences of open market operations on economic conditions.
Verified Answer
KM
Kenneth MunyerMay 27, 2024
Final Answer :
D
Explanation :
When the Federal Reserve buys government bonds on the open market, it injects money into the economy, increasing the money supply. This increase in the money supply leads to a decrease in interest rates, making it cheaper to borrow money. Thus, the interest rate will fall. This can stimulate investment spending as it becomes cheaper for firms to borrow the funds they need to finance new investments.
Learning Objectives
- Comprehend how the Federal Reserve's decisions influence interest rates and the expenditures in investments.
- Gain insights into the consequences of open market operations on economic conditions.