Question

I need help figuring out the second part of the question.

The demand curve and supply curve for one-year discount bonds with a face value of $1,030 are represented by the following equations gt. Price=-08Quantity +1,160 Suppose that, as a result of monetary policy actions, the Federal Reserve sells 80 bonds that it holds. Assume that bond demand and money demand are held constant. Which of the following statements is true? 0 A. O B. If the Fed decreases the supply of bonds in the market by 80, at any given price, the bond supply equation will become Price-Quantity +830 If the Fed increases the supply of bonds in the market by 80, at any given price, the bond supply equation will become Price-Quantity + 790 C. If the Fed increases the supply of bonds in the market by 80, at any given price, the bond supply equation will become Price Quantity +630. D. If the Fed decreases the supply of bonds in the market by 80, at any given price, the bond supply equation will become Price Quantity+770. Calculate the effect on the equilibrium interest rate in this market, as a result of the Federal Reserve action The expected interest rate on a one-year discount bond will ▼ to Round your intermediate calculations to the nearest whole number. Round your final answer to two decimal places.)

Answer 1

B^d: price = -0.6 Quantity + 1160 B^d: price = Quantity + 710 From the above supply equation Quantity supplied = price - 710 Now , i .e Fed increases the supply of bonds in the market by 80 , and the price is the same , then the quantity supplies will be Quantity supplied = price - 710 + 80 Quantity supplied = price - 630 Therefore correct option is c As a result of the Federal reserve action , the new equilibrium will be;- -0.6 Quantity + 1160 = Quantity + 630 1.6 Quantity = 530 Quantity = 530/1.6 Equilibrium quantity almostequalto 331 approx. using the bond supply equation price = 331 + 630 price = 961 therefore Equilibrium price = $ 961 The expected interest rate is given by the formula i = face value - equilibrium price/equilibrium Therefore in our case , the expected interest rate on a one year discount bond will be: - i = 1030 - 961/961 = 0.0718 = 7.18 %