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

question 16

Multiple Choice

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.

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Definitions:

Nonexcludable

A characteristic of a good or service that prevents the owner or provider from excluding individuals from using it once it has been provided.

Marginal Private Benefit

The additional benefit received by a consumer or producer from consuming or producing one more unit of a good or service.

Marginal Social Cost

The total cost to society of producing an additional unit of a good, including both the private costs borne by the producer and any external costs inflicted on others.

Social Optimum

The most efficient allocation of resources in a society, achieving the best outcomes for social welfare.