We would expect which of the following to occur when the central bank pursues contractionary monetary policy?
A)an increase in bond prices and an increase in the interest rate (i)
B)a reduction in bond prices and an increase in i
C)an increase in bond prices and a reduction in i
D)a reduction in bond prices and a reduction in i
E) none of the above

Question

Quizplus · Accepted Answer

When the central bank pursues contractionary monetary policy, it aims to decrease the money supply and increase interest rates to control inflation. This can be achieved through the sale of government bonds, reducing the amount of money in circulation. As a result, the demand for bonds decreases and the price of bonds decreases. When bond prices decrease, interest rates increase, because investors demand a higher return on their investment due to the decreased price of bonds. Therefore, a reduction in bond prices and an increase in interest rates would occur.

We Would Expect Which of the Following to Occur When