Question

An open market purchase by the fed has a tendency to:

a. increase the demand for bonds, drive up bond prices, and raise interest rates.
b. increase the demand for bonds, drive up bond prices, and lower interest rates.
c. increase the supply of bonds, drive down bond prices, and raise interest rates.
d. increase the supply of bonds, drive down bond prices, and lower interest rates.

Answer 1

An open market purchase by the fed has a tendency to:A. increase the demand for bonds, drive up bond prices, and raise interest rates

In open market purchase, the government will sell an investment in the form of bond or other government securities to the market.
When this happen, the demands for government securities will be increased, which lead to an increse in all the bond price due to the high demand.
All of these will increase the amount of money in circulation , which will lead to an increase in interest rates