What happens when the transaction cost of buying and selling bonds decreases? Ba
ID: 1145144 • Letter: W
Question
What happens when the transaction cost of buying and selling bonds decreases? Base your choice on your analysis of the money market and its relationship with the real economy.
Money demand falls.
Interest rate decreases.
Real GDP increases.
All of the above
Which event below is likely to increase money demand, other things unchanged?
An increase in the expected price of bonds
An decrease in the price level
An increase in real GDP
A lower transaction fee on bond purchase and sale.
When the Fed sells government bonds in the open market, what happens as a result?
Money supply decreases.
Bond price increases.
Real GDP increases.
Interest rate decreases.
Money demand falls.
Interest rate decreases.
Real GDP increases.
All of the above
Explanation / Answer
As transaction cost decreases it decreases price of bond in total. We know Price and interest rate has inverse reltionship. Price decrease increase the interest rate . Increase interest decreses the money demand. Therefore Option 1 is correct
Answer for Q2
Incrrease in Money Demand is due to decrease in rates which increase the price of bond
Option 1 is the answer
Answer for Q3
Money supply decrease as government absorb all the liquidity of market
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