Answer to Question #239029 in Macroeconomics for Bawa

Question

Suppose the bank of Ghana purchases Ghc 180 million worth of Government of Ghana bonds to the public. ( a) With the aid of money market diagrams, explain how the money market will be affected.

(b) Explain what will happen to the interest and show why the change in the interest rate will restore the money market back to equilibrium

(c) Use the Keynesian Cross diagram to illustrate and explain how the goods market will be affected by this monetary policy.

(d) Using your answer in part (iii) above can you conclude that the above monetary policy is contractionary? Explain.

Answer 1

When the Bank Of Ghana Purchases Ghc 180 million worth of Government of Ghana bonds to the public, this will increase the demand for bonds as shown in graph (a) from DD to DD' and this will increase the price of the bond. now corresponding to this it increases the money supply by 180 million in ghana shown in graph (b), this will decrease the interest rate. to achieve equilibrium, a lower interest rate rises the investment and net exports, which increases the aggregate demand from AD to AD' sue to this real GDP rises.

c)why the change in the interest rate will restore the money market back to equilibrium

we know price and interest rate are inversely related to each other, so if the government increases the interest rate on bonds, the price of bonds decreases, and people start purchasing the bonds and this will decrease the money supply and the money market will achieve the previous equilibrium. When the government start buying the bonds, this will increase the money supply and sue to this public have enough cash in hand to spend this will increase the aggregate demand and due to this AD curve shifts to upward and this will increase the real GDP.

d) This is a expansionary policy. this is because it increases money supply.