Question

An important way in which the Federal Reserve decreases the money supply is through open market sales—selling bonds in the secondary market to banks or the public.  Using a supply and demand analysis of bondsexplain what happens to the interest rate.  A graph is required for this part of the question.  Make sure that youlabel the graph—axes, curves, and significant points—appropriately.

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Here, the bond market was at an equilibrium at point A. the price of the bond in the market was $95 and the interest rate was 5%. After the supply of the bond increased, the supply curve will shift to right and as the price and interest rate inversely related the interest rate in the market will rise. the new equilibrium will be at B.

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