Question

If the Fed increases its open market purchases of government securities, it exerts a downward pressure on real interest rates. Such a phenomenon is usually referred to as the ______________________ effect.

Answer 1

Answer:

Liquidity Effect

Explanation:

The liquidity effect is one of the resulting outcomes of the government policies which increases money in the economy system. However, the liquidity effect is the cause of the reduction in the real interest rates.

Therefore, If the Fed increases its open market purchases of government securities, it exerts downward pressure on real interest rates. This situation is commonly referred to as LIQUIDITY EFFECT.