We would expect which of the following to occur when the central bank pursues contractionary monetary policy?

Question

Quizplus · Accepted Answer

When the central bank pursues contractionary monetary policy, it aims to decrease the money supply and increase interest rates. This typically leads to a decrease in demand for bonds and therefore a decrease in bond prices. Additionally, as interest rates increase, investors will demand a higher yield on bonds, which also puts downward pressure on bond prices. As bond prices decrease, the corresponding yield will increase (since yield moves inversely to price), resulting in an increase in i. Thus, option B - a decrease in bond prices and an increase in i - is the expected outcome of contractionary monetary policy.

We Would Expect Which of the Following to Occur When