An important way in which the Federal Reservedecreases the money supply is by selling bonds to thepublic. Using a supply and demand analysis for bonds,show what effect this action has on interest rates. Isyour answer consistent with what you would expect tofind with the liquidity preference framework?
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An important way in which the Federal Reserve
decreases the money supply is by selling bonds to the
public. Using a supply and
show what effect this action has on interest rates. Is
your answer consistent with what you would expect to
find with the liquidity preference framework?
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- Using both the liquidity preference framework and thesupply and demand for bonds framework, show whyinterest rates are procyclical (rising when the economyis expanding and falling during recessions).The demand curve and supply curve for one-year discount bonds with a face value of $1,050 are representedby the following equations:Bd: Price = -0.8 * Quantity + 1160Bs: Price = Quantity + 720Suppose that, as a result of monetary policy actions, theFederal Reserve sells 90 bonds that it holds. Assume thatbond demand and money demand are held constant.a. How does the Federal Reserve policy affect the bondsupply equation?b. Calculate the effect on the equilibrium interest rate in this market, as a result of the FederalReserve action.4. Using the same demand curve and supply curve information from question 4, for one-year GASCOHER ‘bonds with a face value of $1.000 B BY: Price = Quantity + 400 Suppose that, a3 a result of monetary policy actions, the Federal Reserve reduces the bonds by 40. Assume that bond demand is constant a How does the Federal Reserve policy affect the bond supply equation? b, Calculate the effect of the Federal Reserve's action on the equilibrium quantity, price and interest rate in this market
- • Suppose that a person’s wealth is $50,000 and that her yearlyincome is $60,000. Also suppose that her money demand functionis given by Md = $Y10.35 - i2Derive the demand for bonds. Suppose the interest rate increases by 10 percentage points. What is the effect on her demand for bonds?What are the effects of an increase in income on her demand for money and her demand for bonds? Explain in wordsPlease answer the correct answer jus need B Don't answer by pen paper please ASAP. Use the graphical bond market model to answer the following questions. In each case, support your answer with a figure, and explain your answer. Label each figure clearly. a. What is the effect of an increase in wealth on interest rates? b. What is the effect of a decrease in expected inflation on interest rates? c. Why does an expectation of an upcoming interest rate hike by the Federal Reserve cause bond prices to fall? Just need B.Which of the following statements is true? Select one OA Ahigher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the left As the interest rate on bonds increases, the opportunity cost of holding money decreases. Oc the market for money is in equilbrium, then the bond market is in disequilibrum OD. A one-ime increase in the money supply will cause prices to rise and the interest rate will rise consequenity
- Assess and interpretthe empirical evidence on the validityof the liquidity preference and portfoliotheories of moneydemand.Suppose a researcher discovers that a measure of thetotal amount of debt in the U.S. economy over thepast 20 years was a better predictor of inflation andthe business cycle than M1 or M2. Does this discoverymean that we should define money as equal to the totalamount of debt in the economy?3. The demand curve and supply curve for one-year discount bonds witha face value of $1,050 are represented by the following equations:Bd: P rice = −0.8 × Quantity + 1160Bs: P rice = Quantity + 720Suppose that, as a result of monetary policy actions, the FederalReserve sells 90 bonds that it holds. Assume that bond demand andmoney demand are held constant.a. How does the Federal Reserve policy affect the bond supply equation?b. Calculate the effect on the equilibrium interest rate in this market,as a result of the Federal Reserve action
- The Federal Reserve has raised the Federal Funds rate by 3.75 percent within the past year. Ifa bank had capital of 10 percent when the Fed began raising rates and has no loans at risk ofdefault, under what circumstances will its capital position be compromised? Please be specific.Suppose a given country experienced low and stableinflation rates for quite some time, but then inflation picked up and over the past decade had beenrelatively high and quite unpredictable. Explain howthis new inflationary environment would affect thedemand for money according to portfolio theories ofmoney demand. What would happen if the governmentdecided to issue inflation-protected securities?Suppose the central bank is following a constantmoney-growth-rate rule and the economy is hit witha severe economic downturn. Use an aggregate supply and demand graph to show the possible effects onthe economy. How does this situation reflect on thecredibility of the central bank if it maintains the moneygrowth rule? How does it reflect on the central bank’scredibility if it abandons the money growth rule torespond to the downturn?