An open market purchase by the central bank will tend to

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Prepare for the Rutgers Macroeconomics Test with multiple choice questions, hints, and explanations. Master key concepts and excel in your exam!

Multiple Choice

An open market purchase by the central bank will tend to

Explanation:
Open market operations involve the central bank buying government bonds. When it buys bonds, it credits banks' reserves, increasing the total reserves in the banking system. That boost in reserves raises the money supply and tends to lower the interest rate because more funds are available for banks to lend. So the effect of an open market purchase is a lower interest rate and an increase in the money supply. The scenario described by raising rates and shrinking the money supply would come from selling bonds, not buying.

Open market operations involve the central bank buying government bonds. When it buys bonds, it credits banks' reserves, increasing the total reserves in the banking system. That boost in reserves raises the money supply and tends to lower the interest rate because more funds are available for banks to lend. So the effect of an open market purchase is a lower interest rate and an increase in the money supply. The scenario described by raising rates and shrinking the money supply would come from selling bonds, not buying.

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