Author Question: Describe the channels through which an open market purchase of bonds by the Fed affects output in a ... (Read 59 times)

nautica902 · **on:** Jun 29, 2018

Describe the channels through which an open market purchase of bonds by the Fed affects output in a closed economy.

What will be an ideal response?

Question 2

If the Fed wants to raise the interest rate, in the short run in the money market the Fed

A) increases the quantity of money.
B) shifts the demand for money curve leftward.
C) shifts the demand for money curve rightward.
D) decreases the quantity of money.
E) directly raises the interest rate and does nothing to either the supply of money or the demand for money.

k.lashomb · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

An open market purchase of bonds by the Fed leads to a rightward shift in the money supply. As a result, interest rates decrease, which in turn increases investment. The higher levels of investment translate into higher output levels.

Answer to Question 2

D