When the Fed buys bonds and injects additional reserves into the banking system, this action will
A) place downward pressure on short-term interest rates.
B) cause many decision makers to expect that the future rate of inflation will fall.
C) place upward pressure on both short-term and long-term interest rates.
D) place upward pressure on short-term interest rates and downward pressure on long-term interest rates.

Question

Quizplus · Accepted Answer

When the Fed buys bonds and injects additional reserves into the banking system, it increases the supply of money which leads to a decrease in short-term interest rates. This is because banks have more money to lend and compete for borrowers by offering lower interest rates.

When the Fed Buys Bonds and Injects Additional Reserves into the Banking