Question

Question 4.Assume an economy of a country B is producing beyond its full employment level and inflation reached an undesirably high level. On the 30th of January 2017 the central bank of a country B conducted a massive increase in sales of the government bonds. Define this policy measure. Summarize the expected short-run consequencesof this policy measure on GDP, inflation rate, unemployment rate, and interest rate of this country. Use appropriate diagrams to explain your statements.

Answer 1

This policy is called open market sale of Us treasury bonds.

It will decrease money supply in the economy as people and banks invest money into bonds.

As money supply Decreases ,money supply curve shift left and create shortage of money at initial equilibrium interest rate. So Shortage of money lead to increase in interest rate.

Increase in interest rate will decrease Investment and thus lesd Decrease in aggregate demand and AD curve shift left , leading to decrease in gdp and Decrease in price.

Decrease in prices will decrease inflation and Decrease in output will decrease employment and increase unemployment.