If the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S. government bonds, then, as a consequence, asset prices
A) increase and the average expected rate of return on assets decreases.
B) decrease and the average expected rate of return on assets increases.
C) increase and the average expected rate of return on assets increases.
D) decrease and the average expected rate of return on assets decreases.

Question

Quizplus · Accepted Answer

When the Federal Reserve uses open-market operations to lower the interest rate on short-term U.S. government bonds, it becomes less attractive to invest in bonds and more attractive to invest in other assets such as stocks or real estate. This leads to increased demand for these assets and causes their prices to rise. However, as more investors enter the market, the average expected rate of return on assets decreases.

If the Federal Reserve Uses Open-Market Operations to Lower the Interest