Assume a fixed demand for money curve and the RBA increases the money supply. In response, people will:
A) sell bonds, thus driving up the interest rate.
B) sell bonds, thus driving down the interest rate.
C) buy bonds, thus driving up the interest rate.
D) buy bonds, thus driving down the interest rate.

Question

Quizplus · Accepted Answer

When the RBA increases the money supply, people will have more money to spend, which will increase the demand for bonds. This will drive up bond prices and decrease interest rates, as individuals will be willing to accept a lower yield in order to purchase these more expensive bonds. Therefore, people will buy bonds, thus driving down the interest rate.

Assume a Fixed Demand for Money Curve and the RBA