When the Fed buys bonds a. the supply of money increases and so aggregate demand shifts right. b. the supply of money decreases and so aggregate demand shifts left. c. the supply of money decreases and so aggregate demand shifts right. d. the supply of money increases and so aggregate demand shifts left.

Question

Business

Caleb Vaughn

7 April, 17:58

When the Fed buys bonds a. the supply of money increases and so aggregate demand shifts right. b. the supply of money decreases and so aggregate demand shifts left. c. the supply of money decreases and so aggregate demand shifts right. d. the supply of money increases and so aggregate demand shifts left.

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Answers (1)

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Devan Marshall · Answer 1

Option (a) is correct.

Explanation:

The federal reserve bank uses open market operations to control the money supply in an economy. Open market operations is a monetary policy instrument.

If Fed buys bonds from the public then as a result money supply in an economy increases and demand for the products also increases. This will shifts the aggregate demand curve rightwards.

On the other hand, if Fed sells these bonds then this will reduce the money supply in an economy and aggregate demand also decreases. This will shifts the aggregate demand curve leftwards.