A decrease in the supply of overnight funds is shown as an upshift of the supply...

4.5 Decrease in supply Co 4.0 f1 Increase in supply Quantity of Reserves

A decrease in the supply of overnight funds is shown as an upshift of the supply curve above because the interest rate (Pick One)

	falls to 3.5% which occurs when there are more funds available.
	rises to 4.5% which occurs when there are more funds available.
	rises to 4.5% which occurs when there are fewer funds available.
	falls to 3.5% which occurs when there are fewer funds available.

Part 2:

Refer to the above market for money diagram. If the interest rate was at 3 percent, people would: (Pick One)

buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate.

sell bonds, which would cause bond prices to rise and the interest rate to rise.

sell bonds, which would cause bond prices to fall and the interest rate to rise.

buy bonds, which would cause bond prices to fall and the interest rate to rise.

Expert Solution

c. rises to 4.5% which occurs when there are fewer funds available
(As we can see, decrease in supply curve shift supply curve upwards which increases the interest rate as fewer funds are available.)

d. sell bonds, which would cause bond prices to fall and the interest rate to rise.
(At 3% interest rate, money demanded is greater than money supplied so people will sell bonds which would reduce the prices of bonds and thus interest rate rises.)

Rahul Sunny answered 2 years ago

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