Suppose that the bond market and the money market start out in equilibrium. Explain the process by which the interest rate and the price of bonds will change as a result of the Fed increasing the money supply
When the Fed increases the money supply (shifting the supply of money curve to the right), it creates a surplus of money. With this surplus of money, individuals will purchase more bonds, shifting the demand for bonds curve to the right. The result is a shortage of bonds at the original bond price, which will push up the price of bonds. As bond prices rise, interest rates fall, and that will occur in the money market. Eventually both markets are back in equilibrium.
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Suppose there is currently a tax of $50 per ticket on airline tickets. Buyers of airline tickets are required to pay the tax to the government. If the tax is reduced from $50 per ticket to $30 per ticket, then the
a. demand curve will shift upward by $20, and the effective price received by sellers will increase by $20. b. demand curve will shift upward by $20, and the effective price received by sellers will increase by less than $20. c. supply curve will shift downward by $20, and the price paid by buyers will decrease by $20. d. supply curve will shift downward by $20, and the price paid by buyers will decrease by less than $20.