Homework Help is Here – Start Your Trial Now!
Business
Economics
b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables.

b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
See similar textbooks
icon
Related questions
Question

b

**13. Let's assume that consumption depends on disposable income, and investment depends on the interest rate and output. Government spending is exogenously determined. Consider that there is an open market sale of bonds by the central bank.** **a. In an IS-LM diagram, show the effect of the open market sale of bonds on output and the interest rate. Explain clearly what causes the curve(s) to shift.** - An open market sale of bonds by the central bank decreases the money supply. This shifts the LM curve to the left, resulting in higher interest rates and lower output. **b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables.** - The increase in interest rates from the bond sale reduces investment and consumption, leading to higher private saving as disposable income adjusts to new equilibrium levels. **c. Suppose the federal government wants to maintain output at the initial level. What must the federal government do in response to the central bank’s sale of bonds to restore output?** - To maintain output, the government would need to increase spending or cut taxes, which would shift the IS curve to the right, offsetting the leftward shift of the LM curve. **Show the effect on output and the interest rate using the IS-LM diagram. What effect will this policy have on private saving?** - With increased government spending or reduced taxes, the output is restored while maintaining higher levels of private saving due to increased disposable income.
Transcribed Image Text:**13. Let's assume that consumption depends on disposable income, and investment depends on the interest rate and output. Government spending is exogenously determined. Consider that there is an open market sale of bonds by the central bank.** **a. In an IS-LM diagram, show the effect of the open market sale of bonds on output and the interest rate. Explain clearly what causes the curve(s) to shift.** - An open market sale of bonds by the central bank decreases the money supply. This shifts the LM curve to the left, resulting in higher interest rates and lower output. **b. How will the open market sale of bonds affect consumption, private saving, and investment in equilibrium? Explain clearly what causes changes in those macroeconomic variables.** - The increase in interest rates from the bond sale reduces investment and consumption, leading to higher private saving as disposable income adjusts to new equilibrium levels. **c. Suppose the federal government wants to maintain output at the initial level. What must the federal government do in response to the central bank’s sale of bonds to restore output?** - To maintain output, the government would need to increase spending or cut taxes, which would shift the IS curve to the right, offsetting the leftward shift of the LM curve. **Show the effect on output and the interest rate using the IS-LM diagram. What effect will this policy have on private saving?** - With increased government spending or reduced taxes, the output is restored while maintaining higher levels of private saving due to increased disposable income.
Expert Solution
Step 1

Open market operations refers to trading of government securities for expanding or contracting the money supply and alter the interest rates. 

steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Nash Equilibrium
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS