Use the following to answer questions .
Exhibit: The Bond Market
-(Exhibit: The Bond Market) Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?
A) It increases.
B) It decreases.
C) It remains unchanged.
D) Short-term interest rates will increase but long-term interest rates will decrease.

Question

Use the following to answer questions .
Exhibit: The Bond Market 
-(Exhibit: The Bond Market) Suppose the Fed takes action that shifts the demand curve from S to S′, as illustrated in Panel (b). What happens to the interest rate?
A) It increases. 
B) It decreases. 
C) It remains unchanged. 
D) Short-term interest rates will increase but long-term interest rates will decrease.

Quizplus · Accepted Answer

When the Fed takes action that shifts the demand curve from S to S', it increases demand for bonds and bond prices go up. As bond prices go up, the corresponding interest rates go down. Therefore, the interest rate decreases.

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