State whether you agree or disagree with the following statement Explain what ha

Question

State whether you agree or disagree with the following statement Explain what happens to (ii) MS, (iii) interest rates and (iv) MD If the central bank buys bonds in the open market interest rates will no doubt rise. TO ANSWER QUESTIONS CHOOSE ONLY FOUR ANSWERS FROM THE LIST BELOW Select one or more: (i) Agree (i) Disagree (ii) MS increases (ii) MS decreases (ii) MS unchanged (iii) interest rate increases (iii) interest rate decreases (iii) interest rate unchanged (iv) MD increases (iv) MD decreases (iv) MD unchanged

Explanation / Answer

Correct Answer:

Disagree

MS increases

Interest rate decreases

MD increases

When the central bank buys bonds in the open market, it is the part of expansionary monetary policy. With the buying of bonds in the open market, the central bank inject money in the economy. As a result, the money supply increases. Further, the interest rates come down to attract the households and firms for consumer and investment spending. It leads to the increase in money demand.

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