Question

QUESTION 28 3 points Save Answer Fill in the blanks below. Possible options are given in the parentheses after each blank. Note that in order to get credits for this question, all your answers must be correct. There is no partial credit (so as to discourage you from simply guessing the answers). Please consider drawing all the relevant curves on a piece of paper to help you visualize the changes. Suppose all relevant markets are in equilibrium. Now, the Fed decides to decrease the money supply by (buying, selling) bonds. This action shifts the demand curve in the bond market to the (left, right). At the same time, the money supply curve shifts to the (left, right). As a result, bond prices (increase, decrease), the interest rate (increases, decreases). In addition, investment and net exports both (increase, decrease), causing real GDP to (increase, decrease).

Answer 1

The Fed decides to decrease the money supply by selling bonds. This action shifts the demand curve in the bond market to the left. At the same time, the money supply curve shifts to the left. As a result, bond price decrease, the interest rate increases. In addition, investment and net exports both decrease, causing real GDP to decrease. Reason: In order to decrease money supply, the Fed engages in sale of securities in the open market Demand for bonds thus decreases and shifts to left, which decreases bond prices Due to sale of securities, money supply decreases, shifting money supply curve to left, leading to an increase in interest rates Since interest rate and investment and exports are inversely related, an increase in interest rates leads to a fall in investment and net exports, leading to a fall in AD curve and thus real GDP.