If the economy is at potential GDP and the Fed makes an open market purchase of government securities, in the short run bank reserves__________ , the nominal interest rate__________ , and the aggregate demand curve __________.
A) increase; falls; shifts rightward
B) increase; rises; shifts rightward
C) stay constant; does not change; does not shift
D) decrease; falls; shifts rightward

Question

Quizplus · Accepted Answer

If the economy is at potential GDP, an open market purchase of government securities by the Fed will increase bank reserves (as the Fed is injecting more money into the economy), lower the nominal interest rate (as banks will have more reserves to lend out), and shift the aggregate demand curve to the right (as lower interest rates stimulate spending and investment). This is consistent with the expansionary monetary policy, which aims to boost economic growth and employment.

If the Economy Is at Potential GDP and the Fed