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20. All else equal, when the Fed purchases government bonds, the money supply curve shifts to...

20. All else equal, when the Fed purchases government bonds, the money supply curve shifts to the ________ and the equilibrium interest rate ________.

  1. left; rises

  2. right; rises

  3. right; falls

  4. left; falls

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Answer #1

Option C.

  • When Fed wants to increase the money supply in the economy, it purchases government securities from open markets through open market operations.
  • This action of Fed will lead to an increase in money supply and the inflation rates in the economy. The amount of reserves held by the banks also increases which allows them to lend more to the public. But the interest rates fall as a result of this action.
  • This will shift the money supply curve to the right and the equilibrium Interest rate falls.
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