Question

An open market purchase of government bonds by the Federal Reserve has a tendency to: a....

An open market purchase of government bonds by the Federal Reserve has a tendency to:

a. shift the demand curve for bonds to the left, decrease the price of bonds, and increase the interest rates.

b. shift the demand curve for bonds to the right, increase the price of bonds, and increase the interest rates.

c. shift the demand curve for bonds to the right, increase the price of bonds, and decrease the interest rates

d. shift the demand curve for bonds to the left, decrease the price of bonds, and decrease the interest rates.

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Answer #1

Answer- Correct option is 'c'

An open market purchase of government bonds by the Federal Reserve has a tendency to shift the demand curve for bonds to the right, increase the price of bonds, and decrease the interest rates. When the federal reserve buy bonds through open market operations, the Fed is increasing the demand for bonds. Open market purchases raise bond prices, open market sale lower the bond price. So, open market operation positively affected bond prices. Interest rate are negatively related to the bond price. It follows open market purchase decrease interest rates that means increase in bond price, decrease the interest rates.

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