In the short run,open-market purchases
A)increase investment and real GDP,and decrease nominal interest rates.
B)increase real GDP and nominal interest rates,and decrease investment.
C)increase investment and nominal interest rates,and decrease real GDP.
D)decrease investment,nominal interest rates,and real GDP.

Question

Quizplus · Accepted Answer

Open-market purchases involve the central bank buying government securities from individuals, which increases the money supply in the economy. With increased money supply, the cost of borrowing reduces, which leads to a decrease in nominal interest rates. As businesses can borrow money at a lower cost, they spend more on investments. This, in turn, increases investment and, thus, real GDP. Therefore, the correct choice is A, which states that in the short run, open-market purchases increase investment and real GDP and decrease nominal interest rates.

In the Short Run,open-Market Purchases