Question

Trace the impact of a sale of government bonds by the Central bank on bond prices, interest rates, investment, aggregate demand, real GDP, and the price level.

Answer 1

1. Selling bonds of short-term will incline  the interest rates which results in decrease of prices of the bonds. Simply put, open market sales tend to decrease the prices of the bonds.

2. Bond prices and interest rates are indirectly proportional. The sale of bonds increase the interest rates and vice versa.

3. The investment and interest rates are directly proportional. So if the interest rates increase, the investments also incline. This is the direct effect and the indirect effect is dependent on the inflation rates.

4. Generally, Monetary policies doesn't affect the aggregate demand directly.This is because the monetary policy undergone changes the level of money supply in the economy which impacts the interest rates and the rates of inflation.

​AD=C+I+G+(X−M)

C=Consumer spending on goods and services

I=Investment spending on business capital goods

G=Government spending on public goods and services

X=Exports

M=Imports​

5. The Real GDP and the aggregate demand are associated directly. If the aggregate demand rises the real GDP also tend to increase.

6. Generally monetary policies are designed in such a way that the price levels are kept stable in the economy. The price levels are dependent on inflation rates and also the purchasing or selling aspects of the bonds.