Question

According to the Keynesian transmission mechanism, if the Fed conducts an open market purchase of government securities, it may cause which of the following in the investment goods market?
a. a rightward shift in the investment demand curve
b.a movement down and along a given investment demand curve
c.a leftward shift in the investment demand curve
d.a movement up and along a given investment demand curve

Answer 1

Answer:

b.a movement down and along a given investment demand curve

Explanation:

The federal reserve used purchase and sale of government securities to control liquidity within the economy. When there is excess liquidity government securities are sold toop up cash. When there is low liquidity the government buys up securities to increase liquidity.

In this instance if the government buys securities it will cause a movement down and along investment demand curve. That is it will result in lower prices and higher quantity being purchased