When government bond prices are changed by monetary policy:
When government bond prices are changed by monetary policy:
A. bond prices and AD move together.
B. bond prices and AD move in opposite directions.
C. bond prices and investment move in opposite directions.
D. bond prices and unemployment tend to move in opposite directions.
E both a. and d. are true.
Homework Answers
Answer: A
AD and bond price have a positive relationship; therefore, they move together. Suppose bond prices drop, it increases market interest rate, which tends to reduce investment and AD.
Other options are not correct:
If “A” is true “B” can’t be.
Option C is not correct, since bond price and investment move together.
Option D is not correct: Suppose bond prices drops and it decreases AD too, which reduces unemployment. Therefore, they move together.
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