Question

The demand curve and supply curve for​ one-year discount bonds with a face value of

​$1,020

are represented by the following​ equations:

Bd​:	Price	=	−0.7Quantity+1,140
Bs​:	Price	=	Quantity+710

Suppose​ that, as a result of monetary policy​ actions, the Bank of Canada sells

110

bonds that it holds. Assume that bond demand and money demand are held constant. Which of the following statements is​ true?

A.If the Bank increases the supply of bonds in the market by

110​,

at any given​ price, the bond supply equation will become

Price=Quantity+820.

B.If the Bank decreases the supply of bonds in the market by

110​,

at any given​ price, the bond supply equation will become

Price=Quantity+860.

C.If the Bank increases the supply of bonds in the market by

110​,

at any given​ price, the bond supply equation will become

Price=Quantity+600.

D.If the Bank decreases the supply of bonds in the market by

110​,

at any given​ price, the bond supply equation will become

Price=Quantity+800.

Calculate the effect on the equilibrium interest rate in this​ market, as a result of the Bank of Canada action.

The expected interest rate on a​ one-year discount bond will

▼

increase

decrease

to

nothing​%.

​(Round your intermediate calculations to the nearest whole number. Round your final answer to two decimal​ places.)

Answer 1

The demand curve and supply curve for​ one-year discount bonds with a face value of ​$1,020 are represented by the following​ equations:

Bd​: Price = −0.7Quantity + 1,140

Bs​: Price = Quantity + 710

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Suppose​ that, as a result of monetary policy​ actions, the Bank of Canada sells 110 bonds that it holds. Assume that bond demand and money demand are held constant. Which of the following statements is​ true?

Correct Answer:

C. If the Bank increases the supply of bonds in the market by 110​, at any given​ price, the bond supply equation will become Price = Quantity + 600

Explanation: The sale of bonds by the BoC increases the supply of bonds, the supply curve shifts to the right. The new intercept term is lower.

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Calculate the effect on the equilibrium interest rate in this​ market, as a result of the Bank of Canada action.

Before the action:

Bd​: Price = −0.7Quantity + 1,140

Bs​: Price = Quantity + 710

-0.7Q + 1140 = Q + 710

1.7Q = 430

Q = 252.94

P = 962.94

After the action:

Bd​: Price = −0.7Quantity + 1,140

Bs​: Price = Quantity + 600

-0.7Q + 1140 = Q + 600

1.7Q = 540

Q = 317.65

P = 917.65

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The expected interest rate on a​ one-year discount bond will: increase

Due to the fall in price, the interest rate will rise.