In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by

Question

a.

selling bonds on the open market, which would have raised the value of money.
b.

purchasing bonds on the open market, which would have lowered the value of money.
c.

purchasing bonds on the open market, which would have raised the value of money.
d.

selling bonds on the open market, which would have raised the value of money.

Answer 1

In the 1970s, in response to recessions caused by an increase in the price of oil, central banks increased their money supplies typically by purchasing bonds on the open market. This action injects money into the economy, effectively lowering the interest rates and increasing the money supply.

The correct answer is:

b. purchasing bonds on the open market, which would have lowered the value of money.

When central banks purchase bonds, they increase the money supply, which can lead to a decrease in the value of money (or its purchasing power) due to inflationary pressures.