|Posted on May 24, 2014 at 9:25 AM|
When the Fed buys treasury bonds, the money supply increases and interest rates fall. This increases investments and consumption spending. Aggregate demand increases, price level increases, and real GDP increases, and unemployment falls.
When the Fed sells government bonds, the money supply decreases and interest rates rise. Investment and consumption decreases, aggregate demand decreases, price level falls, real GDP falls, and unemployment rises.
The No Bull Review video below simplifies monetary policy and open market operations in less than 1 minute. It includes all of the necessary graphs associated with monetary policy action.
AP Macroeconomics Unit 4 Monetary Policy