If the federal reserve increases its purchase of bonds, then the money supply will and aggregate demand will a)decrease; increase b) decrease; decrease c)increase; decrease d) increase; increase

Answer is D.

If Federal Reserve increases its purchase of bonds, the money supply will increase and the aggregate demand will increase.

First of all we need to understand the scenario. Whenever Governments want to control the money supply in the economy, they issue of discontinue the issuance of bonds in the economy. When they issue bonds, general public will purchase the bonds certificates by giving their money to the government, thus decreasing the money flow from the economy. Similarly if the want to increase the money supply, they purchase back the bonds, thus increasing the money flow from the economy.

So in this scenario, if Federal Reserve increases the purchase of bonds, it means the money supply is increased and there are less bonds in the economy. Less bonds mean more demand of bonds. So when FR increases the purchase of bonds, the demand for them also increases.

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