Question

When the FED buys 10-year treasury notes and mortgages + student loan backed securities, inflation in the short run will

1. Drop to 0%

2. Remain the same

3. Increase

When the FED buys 10-year treasury notes and mortgages + student loan backed securities, inflation in the long run will

1. Drop to 0%

2. Remain the same

3. Increase

When the FED buys 10-year treasury notes and mortgages + student loan backed securities, consumption and investments will

1. Drop to 0%

2. Remain the same

3. Increase

How will open market purchases affect the economy short run GDP

1. Go up

2. Not change

3. Not enough info to answer

Answer 1

When FED buys 10 years treasury notes and mortgages + student loan backed securities, Money Supply increases which by lowering the interest rate, increases investment spending. This in turn Increases Aggregate Demand. In the short run, the effect of this is increase in the price level. Thus, inflation will increase.

Third option is correct.

In the long run, prices fully adjust unlike short run where there is partial adjustment in the prices. Therefore, the effect of FED buying 10 year treasury noted and mortgages+ student loans backed securities would lead to increase in Aggregate Demand but in the long run only prices will increase even more than in the short run. Thus, inflation in the long run would Increase.

Third option is correct.

Since this action of FED Increases money supply in the Economy, the real interest rate goes down. This Increases Investment Spending and consequently, consumer Spending in the economy through Multiplier effect.

Third option is correct.

Open market purchase would Increase money supply in the Economy. This would lower the real interest rate and Increases Investment Spending in the Economy which increases Aggregate Demand because of which the GDP goes up in the short run.

First option is correct.