If the Fed buys bonds:

Question

A. Aggregate demand will decrease
B. Bond prices will rise, and interest rates will fall
C. Bond prices will rise, and interest rates will rise
D. Bond prices will fall, and interest rates will rise
E. The money supply will decrease

Answer 1

B. Bond prices will rise, and interest rates will fall

When the Fed buys bonds, it increases the demand for bonds, which in turn drives up bond prices. As bond prices rise, interest rates fall because there is an inverse relationship between bond prices and interest rates. This action by the Fed also increases the money supply in the economy.