Author Question: The inflation rate in Genovia has been rising constantly. What can the central bank of the country ... (Read 49 times)

FButt · **on:** Jun 30, 2018

The inflation rate in Genovia has been rising constantly. What can the central bank of the country do to control inflation?

What will be an ideal response?

Question 2

An increase in bond prices will most likely result in

A) a decrease in the quantity demanded of money.
B) an increase in the quantity demanded of money.
C) an increase in the opportunity cost of holding money.
D) an increase in interest rates.

softEldritch · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The central bank of Genovia should reduce the quantity of bank reserves deposited at the central bank by selling government bonds to private banks. This will lead to an increase in the federal funds rate which will in turn lead to an increase in the long-term interest rate. As a result, both consumption and investment will fall. A fall in consumption and investment leads to a decrease in aggregate demand. As a result, the aggregate price level will fall.

Answer to Question 2

B