ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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both increase
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Money supply increases and interest rates decrease
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money supply decreases and interest rates increases
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None of the above
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Detailed explanation-1: -The bond sales lead to a reduction in the money supply, causing the money supply curve to shift to the left and raising the equilibrium interest rate. Higher interest rates lead to a shift in the aggregate demand curve to the left.
Detailed explanation-2: -A nation’s money supply and interest rates have an inverse relationship. This means interest rates should be lower if there is a higher supply of money in a country’s economy. Conversely, rates should be higher if the money supply is lower.
Detailed explanation-3: -Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing the money supply.
Detailed explanation-4: -Thus, decreasing the money supply from 2, 000 to 1, 500 causes the equilibrium interest rate to rise from 8 percent to 10 percent.