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1 Monetary policy and bonds yields, Use the bonds market equilibrium to graphically show what happens...

1 Monetary policy and bonds yields,

Use the bonds market equilibrium to graphically show what happens to interest rate if the Fed

purchase a large amount of government bonds.

Business   Economics   
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Answer #1

If Fed purchases a large amount of government bonds, there is large increase in money supply in the economy. This shifts money supply curve to right. This is known as an expansionary monetary policy.

This also increases demand for bonds and shifts bond demand curve to right raising bond prices.

Consequently. interest rate decreases and money demand increases. This is because at the original high-interest rate, people wish to keep non-monetary assets rather than cash.

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