Final answer:
An open market purchase by the Federal Reserve is an expansionary monetary policy. This leads to a decrease in interest rates and an increase in the quantity of loaned funds.
Step-by-step explanation:
An open market purchase by the Federal Reserve is an expansionary monetary policy. This is because when the Fed buys bonds on the open market, it increases the money supply.
The increased money supply leads to a decrease in interest rates, which stimulates borrowing for investment and consumption.
In the loanable funds market, an expansionary monetary policy is illustrated by a shift in the supply curve to the right. This means that there is a larger supply of loanable funds available at lower interest rates.
As a result, the equilibrium interest rate decreases and the quantity of loaned funds increases.