Explain what happens to the money supply, interest rates, ...

[ashley]

Explain what happens to the money supply, interest rates, investment spending and GDP when the Fed makes open market bond purchases.
 
  What will be an ideal response?

Question 2

Suppose a country operates on its production possibility frontier when it produces 1000 books and 1000 tables. The combination of ________ reflects ________
 
  A) 500 books and 1000 tables; an inefficient but attainable point.
  B) 500 books and 500 tables; an attainable and efficient point.
  C) 1000 books and 1500 tables; a free lunch.
  D) 1000 books and 1000 tables; a free lunch.
  E) 1000 books and 500 tables; an efficient point.

[aruss1303]

Answer to Question 1

When the Fed purchases bonds in the open market, they transfer money to the market, so the money supply increases. When the money supply increases, money becomes less expensive to obtain, which means interest rates are lower. Lower interest rates will encourage more investment spending, and when investment spending increases, GDP will increase.

Answer to Question 2

A

[ashley]

Gracias!

[kishoreddi]

Excellent