Question

It's the Federal Reserve Board decides to purchase government securities in the open market, the effect will be to

A. Decrease the money supply and cause interest rates to increase
B. Increase the money supply and cause interest rates to decrease
C. Limited amount of money member banks may use for loan purposes, causing interest rates to increase
D. Create a "tight money" market

Answer 1

Purchasing government securities by the Federal Reserve increases the money supply and decreases interest rates, aligning with expansionary monetary policy.

Step-by-step explanation:

When the Federal Reserve Board decides to purchase government securities in the open market, the effect is to increase the money supply and cause interest rates to decrease. This phenomenon occurs because the central bank injects money into the economy, increasing bank reserves. As a result, banks have more funds to lend, which increases the supply of loanable funds, causing the supply curve to shift to the right and interest rates to drop. This could be seen as an expansionary monetary policy approach, which tends to stimulate economic activity by encouraging borrowing and spending.