When the Fed buys bonds, what will happen to the price of bonds in the open market?
Answer Key: Reward 1 point for stating the price will increase due to increase in money supply. (0 point is awarded otherwise)
I could answer that the price of bonds will increase, but my explanation is this:
When the Federal Reserve purchases bonds, the price of bonds will go up. This is because the demand for bonds has increased, which increase bond prices.
Both explanations seem valid to me.
Can someone please explain why my answer is incorrect?