Question

trace the impact of buying more bonds by government on bond prices, interest rate, investment, aggregate demand, real GDP, unemployment , and the price level.

Answer 1

Ans. When government buys more bonds, then demand for bonds in the bond market increases which leads to an increase in price of bonds at given level of supply. This increase in price of bonds means that interest has decreased which leads to a decrease in cost of borrowing which incentivises private investment and consumption in the economy. This increases the aggregate demand for goods shifting the AD curve rightwards to AD'. This increase in aggregate demand at given level of aggregate supply creates a situation of excess demand for goods in the market leading an increase in price level from P to P' this leads to an increase in quantity supplied increasing the output (real GDP) from Y to Y'. An increase in output leads to increase in demand for labour leading to a decrease in rate of unemployment.

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