Answer to Question #188228 in Macroeconomics for Prithibi

Question

Suppose that the central bank sells government bonds. Use a graph of the money market to

show what this does to the value of money and price level.

Answer 1

When the central bank sells government bonds, it takes up liquidity from the market and this decreases the money supply. In the money market, the supply of money decreases and this raises the rate of interest. This causes the investment spending to fall and so general price level falls when goods market experiences a decrease in aggregate demand. Hence, the value of money rises and the price falls.