When the Fed Conducts an Open Market Operation by Purchasing

question 318

Multiple Choice

When the Fed conducts an open market operation by purchasing securities from a bank,__________________ .

• A) the bankʹs reserves increase
• B) public holdings of securities increase
• C) the bankʹs deposits increase but its reserves decrease
• D) the bankʹs deposits increase but its reserves do not change

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Definitions:

Expansionary Gap

A situation where the actual output in an economy exceeds the potential output, often leading to inflation.

Cost-Push Inflation

Cost-push inflation is caused by an increase in the prices of production inputs like labour and raw materials, leading to decreased supply and increased cost of finished goods.

Potential Output

This refers to the maximum output an economy can produce without leading to inflation, assuming all resources are fully utilized.

Actual Price Level

The Actual Price Level refers to the current general level of prices for goods and services in the economy at a specific point in time.