When the Fed conducts open market purchases from banks, interest rates are most likely to:
A)decrease.
B)increase.
C)remain constant.
D)fluctuate randomly.

Question

Quizplus · Accepted Answer

When the Fed conducts open market purchases from banks, it injects more money into the banking system, which increases the supply of money. With more money available, banks are more willing to lend and hence the demand for loans increases. This shift in supply and demand for loanable funds causes the interest rates to decrease. Therefore, the correct choice is A - decrease.

When the Fed Conducts Open Market Purchases from Banks, Interest